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  • P-ISSN1226-0657
  • E-ISSN2287-6081
  • KCI

ISSN : 1226-0657

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Vol.19 No.4

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NEYMAN-PEARSON THEORY AND ITS APPLICATION TO SHORTFALL RISK IN FINANCE

Journal of the Korean Society of Mathematical Education Series B: The Pure and Applied Mathematics / Journal of the Korean Society of Mathematical Education Series B: The Pure and Applied Mathematics, (P)1226-0657; (E)2287-6081
2012, v.19 no.4, pp.363-381
https://doi.org/10.7468/jksmeb.2012.19.4.363
Kim, Ju Hong
Kim,, J. H. (2012). NEYMAN-PEARSON THEORY AND ITS APPLICATION TO SHORTFALL RISK IN FINANCE. Journal of the Korean Society of Mathematical Education Series B: The Pure and Applied Mathematics, 19(4), 363-381, https://doi.org/10.7468/jksmeb.2012.19.4.363

Abstract

Shortfall risk is considered by taking some exposed risks because the superhedging price is too expensive to be used in practice. Minimizing shortfall risk can be reduced to the problem of finding a randomized test <TEX>${\psi}$</TEX> in the static problem. The optimization problem can be solved via the classical Neyman-Pearson theory, and can be also explained in terms of hypothesis testing. We introduce the classical Neyman-Pearson lemma expressed in terms of mathematics and see how it is applied to shortfall risk in finance.

keywords
Neyman-Pearson theory, hypothesis testing, optimal hedging, shortfall risk

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Journal of the Korean Society of Mathematical Education Series B: The Pure and Applied Mathematics

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