Journal of Risk

Conditional value-at-risk-based optimal partial hedging

Jianfa Cong, Ken Seng Tan and Chengguo Weng


In this paper, we consider the problem of optimal partial hedging for a contingent claim subject to a preset hedging budget constraint. Under some technical assumptions on the hedged loss function and the market pricing functional, the optimal partial hedging strategy, which minimizes the conditional value-at-risk (CVaR) of the hedger's total risk exposure, is derived explicitly. Some in-depth analysis is conducted for a utility-based indifference pricing functional. Ample numerical examples are presented to highlight the comparative advantages of the proposed CVaR-based hedging strategy relative to other hedging strategies including expected shortfall hedging, VaR-based hedging strategies and the CVaR hedging strategy of Melnikov and Smirnov. Among these hedging strategies, the numerical examples demonstrate that our proposed CVaR-based hedging is more robust and more effective in terms of managing the tail risk of the hedger's risk exposure.

Sorry, our subscription options are not loading right now

Please try again later. Get in touch with our customer services team if this issue persists.

New to View our subscription options

If you already have an account, please sign in here.

You need to sign in to use this feature. If you don’t have a account, please register for a trial.

Sign in
You are currently on corporate access.

To use this feature you will need an individual account. If you have one already please sign in.

Sign in.

Alternatively you can request an individual account here