HIPERFIT Seminar Talk: Optimal Hedge Tracking Portfolios in a Limit Order Book.

Presenter: Simon Ellersgaard Nielsen, PhD student, IMF/University of Copenhagen

Time: Tuesday, September 29, 2015, 15:15-16:00

Place: AUD 7 (HCØ, Universitetsparken 5)


In this paper we develop a control theoretic solution to the manner in which a portfolio manager optimally should track a targeted delta, given that he wishes to hedge a short position in European call options the underlying of which is traded in a limit order book. Specifically, we are interested in the interplay between posting limit and market orders: when should the portfolio manager do what (and at what price)? To this end, we set up an Hamilton-Jacobi-Bellman quasi-variational inequality which we can solve numerically. Our scheme is shown to be monotone, stable and consistent. Finally, we provide a concrete numerical study, comparing our algorithm with more naive approaches to delta-hedging.


Simon Ellersgaard Nielsen is a graduate student in financial mathematics at the University of Copenhagen, working under the supervision of Rolf Poulsen. His primary research interests lie within optimal portfolio theory and foundational issues in asset pricing. Besides finance, he dabbles in questions pertaining to the fundamental nature of reality.

Host: Martin Elsman/Rolf Poulsen


29 September 2015