Duality theory for exponential utility-based hedging in the Almgren-Chriss model

Yan Dolinsky

doi:https://doi.org/10.1017/jpr.2023.49

Duality theory for exponential utility-based hedging in the Almgren-Chriss model

Yan Dolinsky

Department of Statistics

The Hebrew University of Jerusalem

Research output: Contribution to journal › Article › peer-review

Abstract

In this paper we obtain a duality result for the exponential utility maximization problem where trading is subject to quadratic transaction costs and the investor is required to liquidate her position at the maturity date. As an application of the duality, we treat utility-based hedging in the Bachelier model. For European contingent claims with a quadratic payoff, we compute the optimal trading strategy explicitly.

Original language	English
Journal	Journal of Applied Probability
DOIs	https://doi.org/10.1017/jpr.2023.49
State	Accepted/In press - 2023

Keywords

Bachelier model
duality
Exponential utility
linear price impact

All Science Journal Classification (ASJC) codes

Statistics and Probability
Mathematics(all)
Statistics, Probability and Uncertainty

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https://doi.org/10.1017/jpr.2023.49

Cite this

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title = "Duality theory for exponential utility-based hedging in the Almgren-Chriss model",

abstract = "In this paper we obtain a duality result for the exponential utility maximization problem where trading is subject to quadratic transaction costs and the investor is required to liquidate her position at the maturity date. As an application of the duality, we treat utility-based hedging in the Bachelier model. For European contingent claims with a quadratic payoff, we compute the optimal trading strategy explicitly.",

keywords = "Bachelier model, duality, Exponential utility, linear price impact",

author = "Yan Dolinsky",

note = "Funding Information: Supported in part by GIF grant 1489-304.6/2019 and ISF grant 230/21. Publisher Copyright: {\textcopyright} 2023 The Author(s).",

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AB - In this paper we obtain a duality result for the exponential utility maximization problem where trading is subject to quadratic transaction costs and the investor is required to liquidate her position at the maturity date. As an application of the duality, we treat utility-based hedging in the Bachelier model. For European contingent claims with a quadratic payoff, we compute the optimal trading strategy explicitly.

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KW - duality

KW - Exponential utility

KW - linear price impact

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JO - Journal of Applied Probability

JF - Journal of Applied Probability

ER -

Duality theory for exponential utility-based hedging in the Almgren-Chriss model

Abstract

Keywords

All Science Journal Classification (ASJC) codes

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