Can expected shortfall and value-at-risk be used to statically hedge options? (English) Zbl 1194.91199
From the introduction: The main focus of our paper is to show that hedging using expected shortfall (ES) can lead to a new perverse behavior. This new problem also occurs when one uses value-at-risk (VaR) as the risk measure to determine the optimal hedging strategy. ES has a strong theoretical underpinning, whereas VAR is known to suffer from a number of problems. Since the analysis for ES is more complicated than that for VaR, we first present the analysis of the new phenomenon for VaR, and then proceed to that for ES. This is due to the fact that the dynamics of the phenomenon which we have identified is similar for both VaR and ES, but it is much easier to understand in the VaR setting.
MSC:
| 91G70 | Statistical methods; risk measures |
| 62P05 | Applications of statistics to actuarial sciences and financial mathematics |
| 91G10 | Portfolio theory |
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