The Feedback Effect of Hedging in Portfolio Optimization
Pierre Henry-Labordere
TL;DR
This paper explores how a large trader's hedging strategy impacts asset prices and how to optimize their portfolio considering this feedback effect.
Contribution
It introduces a method to optimize portfolios accounting for the feedback effect of hedging on asset prices.
Findings
Hedging strategies influence asset prices significantly.
Portfolio optimization must consider feedback effects for accuracy.
The approach improves risk management in large trades.
Abstract
In this short note, we will show how to optimize the portfolio of a large trader whose hedging strategy affects the price of his assets.
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Taxonomy
TopicsFinancial Markets and Investment Strategies · Economic theories and models