HAL will be down for maintenance from Friday, June 10 at 4pm through Monday, June 13 at 9am. More information
Skip to Main content Skip to Navigation

Worst Case Management of the Model Risk in Option Hedging

Denis Talay 1 Ziyu Zheng 1
1 OMEGA - Probabilistic numerical methods
CRISAM - Inria Sophia Antipolis - Méditerranée , UHP - Université Henri Poincaré - Nancy 1, Université Nancy 2, CNRS - Centre National de la Recherche Scientifique : UMR7502
Abstract : We are interested in Model Risk control problems. We study a strategy for the trader which, in a sense, guarantees good performances whatever is the unknown model for the assets of his/her portfolio. We consider the Model Risk control problem as a two players (Trader versus Market) zero-sum stochastic differential game problem. corresponding to a `worst case' worry: the trader chooses trading strategies to decrease the risk and therefore acts as a minimizer; the market systematically acts against the interest of the trader, so that we consider it acts as a maximizer. This stochastic game problem can be viewed as a continuous-time extension of discrete-time strategies based upon prescriptions issued from VaR analyses at the beginning of each period. In addition, the initial value of the optimal portfolio can be seen as the minimal amount of money which is needed to face the worst possible damage. We give a proper mathematical statement for such a game problem. We prove that the value function of this game problem is the unique viscosity solution to an Hamilton-Jacobi-B-ell- man-Isaacs equation, and satisfies the Dynamic Programming Principle.
Document type :
Complete list of metadata

Cited literature [1 references]  Display  Hide  Download

Contributor : Rapport de Recherche Inria Connect in order to contact the contributor
Submitted on : Tuesday, May 23, 2006 - 8:14:59 PM
Last modification on : Friday, February 4, 2022 - 3:18:25 AM
Long-term archiving on: : Sunday, April 4, 2010 - 11:01:03 PM


  • HAL Id : inria-00072259, version 1



Denis Talay, Ziyu Zheng. Worst Case Management of the Model Risk in Option Hedging. [Research Report] RR-4328, INRIA. 2002, pp.24. ⟨inria-00072259⟩



Record views


Files downloads