Strong stop-loss criteria: definition and application to risk management

Document description

In this paper, we define the concept of strong stop-loss domination and we use it for the obtention of bounds on the hedging price of random variables. These hedging prices depend on the characteristics of the agent and in particular on her utility function, which in hard to estimate in practice. Our bounds have the advantage that they only depend on the characteristics of the financial market and of the random variable to hedge. Moreover, our interval is proved to be coherent with the equilibrium and it is tighter than the one obtained by the classical superreplication approach. At last, specifying the distribution of the financial assets' prices and the random variable to hedge, we compute the upper bound given by the strong stoploss approach and we compare it with the superreplication bound.