Hedging with options and cardinality constraints in multi‐period portfolio management systems
Abstract
Purpose
The purpose of this paper is to study the effects of hedging with options and cardinality constraints in multi‐period portfolio management systems.
Design/methodology/approach
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.
Findings
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.
Originality/value
The paper demonstrates that the multiple representations framework constructed to generate optimal predictions provides accurate forecasts with obvious value for portfolio management.
Keywords
Citation
Östermark, R. (2011), "Hedging with options and cardinality constraints in multi‐period portfolio management systems", Kybernetes, Vol. 40 No. 5/6, pp. 703-718. https://doi.org/10.1108/03684921111142269
Publisher
:Emerald Group Publishing Limited
Copyright © 2011, Emerald Group Publishing Limited