Mean-variance hedging with uncertain trade execution

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2 Citations (Scopus)


This paper studies a hedging problem of a contingent claim in a discrete time model. The contingent claim is hedged by one illiquid risky asset and the hedging error is measured by a quadratic criterion. In our model, trade does not always succeed and then trade times are not only discrete, but also random. The uncertainty of trade execution represents the liquidity risk. First we find an optimal hedging strategy with fixed initial condition. Next we consider an optimal initial condition. Finally, we study a binomial model as a simple example.

Original languageEnglish
Pages (from-to)219-252
Number of pages34
JournalApplied Mathematical Finance
Issue number3
Publication statusPublished - 2009

All Science Journal Classification (ASJC) codes

  • Finance
  • Applied Mathematics


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