Mar

8

I am giving a talk on a paper that I read. The problem under consideration is the following: you have risky assets in which you can invest, and you will have to cover a contingent claim at some future time which depends on the future value of the risky assets (e.g., a put option on one of them). You have some initial wealth and wish to invest in the risky assets so that you can cover your contingent claim. The problem is to find the minimal wealth that will allow you to do this. This paper finds a way to determine the minimal wealth that will allow you to hedge your contingent claim with a prespecified probability. (Stochastic Target Problems with Controlled Loss by B. Bouchard, R. Elie and N. Touzi)

I am working with a professor who would like us to apply these techniques to optimal investing with drawdown constraints. If you set out to find the optimal investment strategy subject to the condition that your final wealth is not less than its running max, you will stay out of the market. We want to see what happens if you optimize under the constraint that your final wealth is not less than its running max with some high probability.

Here are the slides of my talk.


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