Hedging without sweat : a genetic programming approach

Abstract

Hedging in the presence of transaction costs leads to complex op- timization problems. These problems typically lack closed-form so- lutions, and their implementation relies on numerical methods that provide hedging strategies for speci c parameter values. In this paper we use a genetic programming algorithm to derive explicit formulas for near-optimal hedging strategies under nonlinear transaction costs. The strategies are valid over a large range of parameter values and require no information about the structure of the optimal hedging strategy.