Duality theory for exponential utility-based hedging in the Almgren-Chriss model

Yan Dolinsky*

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

Abstract

In this paper we obtain a duality result for the exponential utility maximization problem where trading is subject to quadratic transaction costs and the investor is required to liquidate her position at the maturity date. As an application of the duality, we treat utility-based hedging in the Bachelier model. For European contingent claims with a quadratic payoff, we compute the optimal trading strategy explicitly.

Original languageAmerican English
Pages (from-to)420-438
Number of pages19
JournalJournal of Applied Probability
Volume61
Issue number2
DOIs
StatePublished - 3 Jun 2024

Bibliographical note

Publisher Copyright:
© The Author(s), 2023. Published by Cambridge University Press on behalf of Applied Probability Trust.

Keywords

  • Bachelier model
  • Exponential utility
  • duality
  • linear price impact

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