Hedging with options and cardinality constraints in multi‐period portfolio management systems

The purpose of this paper is to study the effects of hedging with options and cardinality constraints in multi‐period portfolio management systems.

The paper focuses on a recursive multi‐period portfolio management formulation (SHAREX) subject to hedging with cardinality constraints and options. The problem formulation is tested with observed and simulated data.

The yield of the multi‐period cardinality constrained option hedging framework under integer‐valued transactions and fixed and variable transactions costs exceeds the riskless return predicted by the Black‐Scholes model in equilibrium.

The paper demonstrates that the multiple representations framework constructed to generate optimal predictions provides accurate forecasts with obvious value for portfolio management.