Crash hedging strategies and worst–case scenario portfolio optimization
Menkens, Olaf
(2006)
Crash hedging strategies and worst–case scenario portfolio optimization.
International Journal of Theoretical and Applied Finance, 9
(4).
pp. 597-618.
ISSN 0219-0249
Crash hedging strategies are derived as solutions of non–linear differential equations which itself are consequences of an equilibrium strategy which make the investor indifferent to uncertain (down) jumps. This is
done in the situation where the investor has a logarithmic utility and where the market coefficients after a possible crash may change. It is scrutinized when and in which sense the crash hedging strategy is optimal. The situation
of an investor with incomplete information is considered as well. Finally, introducing the crash horizon, an implied volatility is derived.