Journal of Applied Mathematics and Stochastic Analysis
Volume 2008 (2008), Article ID 275217, 20 pages
Research Article

A Time-Series Approach to Non-Self-Financing Hedging in a Discrete-Time Incomplete Market

N. Josephy, L. Kimball, and V. Steblovskaya

Department of Mathematical Sciences, Bentley College, 175 Forest Street, Waltham, MA 02452-4705, USA

Received 16 May 2008; Accepted 30 July 2008

Academic Editor: Nikolai Leonenko

Copyright © 2008 N. Josephy et al. This is an open access article distributed under the Creative Commons Attribution License, which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited.


We present an algorithm producing a dynamic non-self-financing hedging strategy in an incomplete market corresponding to investor-relevant risk criterion. The optimization is a two-stage process that first determines market calibrated model parameters that correspond to the market price of the option being hedged. In the second stage, an optimal set of model parameters is chosen from the market calibrated set. This choice is based on stock price simulations using a time-series model for stock price jump evolution. Results are presented for options traded on the New York Stock Exchange.