Center for Economic Research, Department of Economics, University of Minnesota
We address the issue of hedging in infinite horizon markets with a type of constraints
that the set of feasible portfolio holdings forms a convex cone. We show
that the minimum cost of hedging a liability stream is equal to its largest present
value with respect to admissible stochastic discount factors, thus can be determined
without finding an optimal hedging strategy. We solve for an optimal hedging
strategy by solving a sequence of independent one-period hedging problems.
We apply the results to a variety of trading restrictions and also show how the
admissible stochastic discount factors can be characterized.
Huang, K.X., (1999), "Infinite-Horizon Optimal Hedging Under Cone Constraints", Discussion Paper No. 304, Center for Economic Research, Department of Economics, University of Minnesota.
Huang, Kevin Xiaodong.
Infinite-Horizon Optimal Hedging Under Cone Constraints.
Center for Economic Research, Department of Economics, University of Minnesota.
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