Hedging with options and cardinality constraints in multi‐period portfolio management systems
Purpose – The purpose of this paper is to study the effects of hedging with options and cardinality constraints in multi‐period portfolio management systems.Design/methodology/approach – The paper focuses on a recursive multi‐period portfolio management formulation (SHAREX) subject to hedging with cardinality constraints and options. The problem formulation is tested with observed and simulated data.Findings – The yield of the multi‐period cardinality constrained option hedging framework under integer‐valued transactions and fixed and variable transactions costs exceeds the riskless return predicted by the Black‐Scholes model in equilibrium.Originality/value – The paper demonstrates that the multiple representations framework constructed to generate optimal predictions provides accurate forecasts with obvious value for portfolio management.