The Pure and Applied Mathematics (한국수학교육학회지시리즈B:순수및응용수학)

Korean Society of Mathematical Education (한국수학교육학회)
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NEYMAN-PEARSON THEORY AND ITS APPLICATION TO SHORTFALL RISK IN FINANCE

  • Kim, Ju Hong (Department of Mathematics, Sungshin Women's University)
  • Received : 2012.08.07
  • Accepted : 2012.11.04
  • Published : 2012.11.30
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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 ${\psi}$ 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.

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