Optimal Derivatives Strategies with Discrete Rebalancing

Branger Nicole, Breuer Beate, Schlag Christian


Abstract
In this article, we determine the optimal investmentstrategy with derivatives for discrete rebalancing intervals.We find that the investor buys a more conservativeportfolio and strongly reduces his exposure tovolatility compared to the continuous-time case. Thisleads to much less extreme positions in the derivatives.Even with monthly rebalancing, the investorcan nevertheless realize up to almost two-thirds ofthe utility gain from option trading in continuoustime. Variance contracts are useful due to their stable exposures to volatility and jump risk.

Keywords
Asset Allocation; Discrete Trading; Use of Derivatives



Publication type
Research article (journal)

Peer reviewed
Yes

Publication status
Published

Year
2008

Journal
Journal of Derivatives

Volume
16

Issue
2

Start page
67

End page
84

Language
English

ISSN
1074-1240

DOI

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