Robust Hedging Valuation Adjustment under Liquidity--Demand Stress

2026/06/25 by Takayuki Sakuma · 1 voice
Economics, Econometrics and Finance · #q-fin.RM #q-fin.CP

paper · pdf

arxiv published 2026/06/25 · arxiv updated 2026/06/26

Abstract

This paper develops a robust hedging valuation adjustment (HVA) measure for dynamic hedging. Simulated rebalancing and maturity-unwind trades generate a loss distribution for each no-trade-band rule, and we define robust HVA as the worst-case expected loss over a relative-entropy neighborhood of that distribution. Because band width affects turnover, the same relative-entropy radius applied to different bands can imply different levels of demand-liquidity stress. We distinguish a fixed-radius convention from a fixed benchmark-stress convention and show that wider no-trade bands lower rebalancing costs but raise hedge-error risk.

Citations

• Hedging Valuation Adjustment for Callable Claims
• Handling model risk with XVAs
• The Pricing of Options and Corporate Liabilities

Discussions

• Takayuki Sakuma: Robust Hedging Valuation Adjustment under Liquidity--Demand Stress https://arxiv.org/abs/2606.26731 https://arxiv.org/pdf/2606.26731 https://arxiv.org/html/2606.26731 [bsky, 0 points, 0 comments]

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