The Geneva Risk and Insurance Review

, Volume 36, Issue 2, pp 112–131

(S,s)-adjustment Strategies and Hedging under Markovian Dynamics

  • Elettra Agliardi
  • Rainer Andergassen
Article

DOI: 10.1057/grir.2010.7

Cite this article as:
Agliardi, E. & Andergassen, R. Geneva Risk Insur Rev (2011) 36: 112. doi:10.1057/grir.2010.7

Abstract

We study the destabilizing effect of hedging strategies under Markovian dynamics with transaction costs. Once transaction costs are taken into account, continuous portfolio rehedging is no longer an optimal strategy. Using a non-optimizing (local in time) strategy for portfolio rebalancing, explicit dynamics for the price of the underlying asset are derived, focusing in particular on excess volatility and feedback effects of these portfolio insurance strategies. Moreover, it is shown how these latter depend on the heterogeneity of the insured payoffs. Finally, conditions are derived under which it may be still reasonable, from a practical viewpoint, to implement Black–Scholes strategies.

Keywords

(S,s)-adjustment strategiesdynamic hedgingvolatilityBlack–Scholes modeltransaction costs

Copyright information

© The International Association for the Study of Insurance Economics 2011

Authors and Affiliations

  • Elettra Agliardi
    • 1
    • 2
  • Rainer Andergassen
    • 1
    • 2
  1. 1.Department of Economics, University of BolognaBologna (BO)Italy
  2. 2.RCEARimini (RN)Italy