impact of the carbon price on the integrating european electricity market we study the impact of the carbon price on the integrating electricity market in the eu our theoretical framework suggests that the price of carbon has a positive but uneven impact on electricity prices depending on the marginal production plant the carbon price may increase price differences in the short run we apply time series analysis on daily forward data from 2003 to 2011 and investigate whether we can find empirical evidence for our analytical findings our results support the hypotheses that integration in electricity prices has increased over time and that the carbon price has a positive but uneven impact on the integration of prices

time varying convergence in european electricity spot markets and their association with carbon and fuel prices abstract long run dynamics of electricity prices are expected to reflect fuel price developments since fuels generally account for a large share in the cost of generation as an integrated european market for electricity develops wholesale electricity prices should be converging as a result of market coupling and increased interconnectivity electricity mixes are also changing spurred by a drive to significantly increase the share of renewables consequently the electricity wholesale price dynamics are evolving and the fuel electricity price nexus that has been described in the literature is likely to reflect this evolution this study investigates associations between spot prices from the british french and nordpool markets with those in connected electricity markets and fuel input prices from december 2005 to october 2013 in order to assess the time varying dynamics of electricity spot price series localized autocorrelation functions are used electricity spot prices in the three markets are found to have stationary and non stationary periods when a trend in spot prices is observed it is likely to reflect the trend in fuel prices cointegration analysis is then used to assess co movement between electricity spot prices and fuel inputs to generation the results show that british electricity spot prices are associated with fuel prices and not with price developments in connected markets while the opposite is observed in the french and nordpool day ahead markets

sustainable innovation business models and economic performance an overview sustainable development requires radical and systemic innovations such innovations can be more effectively created and studied when building on the concept of business models this concept provides firms with a holistic framework to envision and implement sustainable innovations for researchers the concept provides an analytical tool that allows them to assess the interplay between the different aspects that firms combine to create ecological economic and social value in addition the business model concept provides a link between the individual firm and the larger production and consumption system in which it operates this paper provides an introduction to the special issue which emerged from selected papers presented at the erscp emsu 2010 conference held in delft the netherlands papers in the special issue cover a broad range from a conceptual discussion resulting in a research agenda the assessment of diffusion of specific business models such as product service systems the introduction of new management tools for business transition management to case studies on how specific business models evolved in specific communities together these papers provide insight into the promise of the business model concept for understanding and advancing sustainable innovation

the impact of wind power generation on the electricity price in germany abstract this paper investigates the relationship between intermittent wind power generation and electricity price behaviour in germany using a garch model i evaluate the effect of wind electricity generation on the level and the volatility of the electricity price in an integrated approach the results show that variable wind power reduces the price level but increases its volatility this paper s results also indicate that regulatory change has stabilised the wholesale price the electricity price volatility has decreased in germany after a modification of the marketing mechanism of renewable electricity this gives confidence that further adjustments to regulation and policy may foster a better integration of renewables into the power system

are electricity prices affected by the us dollar to euro exchange rate the spanish case abstract the objective of this paper is to investigate the relationships between spanish electricity spot prices and the us dollar euro usd euro exchange rate during the period 2005 2007 taking into account the study of the association between dollar and oil prices in order to better understand the evolution of the former over time the first finding in this study is that spanish electricity spots prices the usd euro exchange rate and oil prices are cointegrated therefore there is a long run equilibrium relationship between the three variables short run relationships have been detected between oil prices and spanish electricity prices and usd euro exchange rate in the sense that spanish electricity prices and usd euro exchange rate are affected by oil prices in the short run there is a transmission of volatility between usd euro exchange rate and oil prices to spanish electricity prices so although spanish electricity prices are not affected in level by the movements of usd euro exchange rate they are in volatility in this kind of scenario the conclusions confirm that for countries so dependent on external causes as spain one possible solution for guarantying the energy security would be the promotion of the renewable energies therefore we cannot ignore the impact in the internal expenses of the cost of installation and generation of green energies so there must be a balance between the increase in renewables and the reasonable market price of the electricity

option pricing with transaction costs using a markov chain approximation an efficient algorithm is developed to price european options in the presence of proportional transaction costs using the optimal portfolio framework of davis in dempster m a h pliska s r eds mathematics of derivative securities cambridge university press cambridge uk a fair option price is determined by requiring that an infinitesimal diversion of funds into the purchase or sale of options has a neutral effect on achievable utility this results in a general option pricing formula in which option prices are computed from the solution of the investor s basic portfolio selection problem without the need to solve a more complex optimisation problem involving the insertion of the option payoff into the terminal value function option prices are computed numerically using a markov chain approximation to the continuous time singular stochastic optimal control problem for the case of exponential utility comparisons with approximately replicating strategies are made the method results in a uniquely specified option price for every initial holding of stock and the price lies within bounds which are tight even as transaction costs become large a general definition of an option hedging strategy for a utility maximising investor is developed this involves calculating the perturbation to the optimal portfolio strategy when an option trade is executed

industry self regulation without sanctions the chemical industry s responsible care program industry self regulation the voluntary association of firms to control their collective action has been proposed as a complement to government regulation proponents argue that the establishment of

option replication in discrete time with transaction costs option replication is discussed in a discrete time framework with transaction costs the model represents an extension of the cox ross rubinstein binomial option pricing model to cover the case of proportional transaction costs the method proceeds by constructing the appropriate replicating portfolio at each trading interval numerical values of these prices are presented for a range of parameter values the paper derives a simple black scholes type approximation for the option prices with transaction costs and demonstrates numerically that it is quite accurate for plausible parameter values

cointegration analysis of spot electricity prices insights on transmission efficiency in the western us abstract the us energy policy act of 1992 promoted the development of spot markets for electric power by requiring utilities to open their transmission systems to wholesale power sales in this paper we specify and estimate a vector error correction model using peak and off peak electricity spot prices during 1994 1996 covering 11 regional markets in the western united states and test these prices for evidence of market integration the results show evidence of an efficient and stable wholesale power market

customer regulatory and competitive pressure as drivers of environmental innovation we develop an economic analysis in order to examine the effects of consumer regulatory and competitive pressure on firm investments in environmentally friendly production specifically we ask why do firms vary in their levels of environmental innovation under what conditions are such pressures effective in bringing about environmental innovation we first consider a monopolist who faces the twin pressures of reduced customer demand and regulatory penalties as a result of its emissions in response to these pressures the firm has the opportunity to make a costly investment in reduction of emissions secondly we consider a competitive scenario in which two firms compete for environmentally sensitive customers solving our model we find that pressure has the intended effect as long as the firm s initial level of emissions is below a certain threshold if the emissions are above this threshold we find that pressure might have an adverse effect on the firm s environmental investment and that subsidies that support environmental innovation can be a better alternative we also show that competition over environmentally sensitive customers can improve the effectiveness of environmental pressures

success factors for environmentally sustainable product innovation a systematic literature review the growing awareness regarding environmental sustainability has fully reached business reality consumers and companies alike are looking for alternatives to mitigate pressing environmental demands resulting from continuous population and economic growth on the other hand companies must deal with an increasingly competitive scenario where innovation is regarded as a survival need in most markets it is thus clear that systematic academic research is paramount to guide companies to succeed in environmentally sustainable product innovation in this context this paper i consolidate extant research and aggregate findings of different studies on environmentally sustainable product innovation through an interpretative framework of published literature on the topic and ii map critical success factors that drive the success of product innovation developed in this new logic of production and consumption to achieve these objectives a systematic literature review on environmentally sustainable product innovation was conducted results show that there are four main critical success factors for environmentally sustainable product innovation market law and regulation knowledge interfunctional collaboration innovation oriented learning and r d investments the factors identified in this research and corresponding variables were subjected to a brief empirical test by professionals the test allowed a preliminary approval of the developed framework and identification of the most important variables within each factor a research agenda based on the state of the art on the topic is also proposed

optimal delta hedging under transactions costs this paper examines the problem of delta hedging portfolios of options under transactions costs by maximising expected utility or minimising a loss function on the replication error we extend the work of hodges and neuberger 1989 to study the optimal strategy under a general cost function with fixed and proportional costs a computational procedure for solving this problem is described and we develop an efficient computational method for the case of proportional transaction costs we examine the nature of the solution close to the expiry date and using simulation we compare the performance of the optimal strategies with other common strategies

market integration among electricity markets and their major fuel source markets dynamic price information flows among u s electricity wholesale spot prices and the prices of the major electricity generation fuel sources natural gas uranium coal and crude oil are studied multivariate time series methods applied to weekly price data show that in contemporaneous time peak electricity prices move natural gas prices which in turn influence crude oil in the long run price is discovered in the fuel sources market except uranium as these prices are weakly exogenous in a reduced rank regression representation of these energy prices

toward a new conception of the environment competitiveness relationship accepting a fixed trade off between environmental regulation and competitiveness unnecessarily raises costs and slows down environmental progress studies finding high environmental compliance costs have traditionally focused on static cost impacts ignoring any offsetting productivity benefits from innovation they typically overestimated compliance costs neglected innovation offsets and disregarded the affected industry s initial competitiveness rather than simply adding to cost properly crafted environmental standards can trigger innovation offsets allowing companies to improve their resource productivity shifting the debate from pollution control to pollution prevention was a step forward it is now necessary to make the next step and focus on resource productivity

convergence from discrete to continuous time contingent claims prices this article generalizes the cox ross and rubinstein 1979 binomial option pricing model and establishes a convergence from discrete time multivariate multinomial models to continuous time multidimensional diffusion models for contigent claims prices the key to the approach is to approximate the n dimensional diffusion price process by a sequence of n variate n 1 nomial processes it is shown that contingent claims prices and dynamic replicating portfolio strategies derived from the discrete time models converge to their corresponding continuous time limits article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

what exactly are technological regimes intra industry heterogeneity in the organization of innovation activities this empirical study analyzes the patterns of innovation within and across industries using firm level survey data from finland and denmark the theoretical starting point is evolutionary theory with its premise that firms in different technological regimes pursue different paths to innovation similar modes of behaviour are found in the two datasets and they closely correspond to those found in earlier studies contrary to prevailing assumptions however the results show that industries are not at all uniform in terms of how firms innovate in almost all four or five digit nace industries three or more different modes of innovation can be identified this suggests that firms strategic differentiation or local search activities overcome pressures in the technological environment towards homogenous behaviour at least in the short term

critical factors for transforming creativity into sustainability abstract although creativity and sustainability have received considerable attention in the literature there is limited research considering both particularly in relation to co existing organizational factors which facilitate the transformation of creativity into sustainable products this paper explores this gap through an analysis of six case studies of commercial organizations presenting both successful and unsuccessful implementation of sustainable products services across types of firms and industries the research framework focuses on three general facets 1 leadership 2 boundaries where different aspects of internal and external firm s activities enable a diversity of opinions and stakeholder engagement and 3 economic alignment instrumentality in which the goal of wealth creation is present and supported by a firm s capabilities the main finding of the paper is that appropriate leadership along with effective boundary spanning and clear profit orientation are simultaneously necessary conditions for successful transformation of creative business ideas into successful sustainable products services by business organizations this implies a steep discounting of success prospects if any of the above factors is lacking the work contributes to the development of general theoretical frameworks and approaches for achieving organizational success based on co creating social and economic value at the same time

dynamic portfolio optimization with transaction costs and state dependent drift the problem of dynamic portfolio choice with transaction costs is often addressed by constructing a markov chain approximation of the continuous time price processes using this approximation we present an efficient numerical method to determine optimal portfolio strategies under time and state dependent drift and proportional transaction costs this scenario arises when investors have behavioral biases or the actual drift is unknown and needs to be estimated our numerical method solves dynamic optimal portfolio problems with an exponential utility function for time horizons of up to 40 years it is applied to measure the value of information and the loss from transaction costs using the indifference principle

dynamic portfolio selection with fixed and or proportional transaction costs using non singular stochastic optimal control theory abstract the dynamic portfolio selection problem with fixed and or proportional transaction costs is studied the portfolio consists of a risk free asset and a risky asset whose price dynamics is governed by geometric brownian motion the objective is to find the amounts invested in the risk free and risky assets that maximize the expected value of the discounted utility of terminal wealth the dynamic optimization problem is formulated as a non singular stochastic optimal control problem numerical results are presented for buy and sell no transaction interfaces and buy and sell targets that characterize the optimal policies of a constant relative risk aversion investor

deliverability and regional pricing in u s natural gas markets during the 1980s and early 90s interstate natural gas markets in the united states made a transition away from the regulation that characterized the previous three decades with abundant supplies and plentiful pipeline capacity a new order emerged in which freer markets and arbitrage closely linked natural gas price movements throughout the country after the mid 1990s however u s natural gas markets tightened and some pipelines were pushed to capacity we look for the pricing effects of limited arbitrage through causality testing between prices at nodes on the u s natural gas transportation system and interchange prices at regional nodes on north american electricity grids our tests do reveal limited arbitrage which is indicative of bottlenecks in the u s natural gas pipeline system

a hard nut to crack implementing supply chain sustainability in an emerging economy abstract in the last decade sustainable supply chain management has become a key topic in the sustainability literature as well as a buzzword in industry and policy circles although research has made substantial contributions there is a lack of understanding on how focal companies operating in emerging economies can lead the implementation of sustainability into their supply chains this research connects and advances the constructs of cleaner production sustainability and supply chains by exploring a classic case of a focal company operating in an emerging economy that even facing considerable challenges has been able to succeed in transforming its entire supply chain drawing from stakeholder theory and contingency theory this research offers four key contributions to the sustainability and supply chain discourses as follows 1 it proposes an innovation centered approach to sustainable supply chain management by adapting and extending the tcos uncertainty framework 2 it suggests that the way a focal company manages and is influenced by its established network of relationships shape the evolution of the supply chain sustainability trajectories 3 it argues that supply chains are dynamic entities and should then be considered and understood through the lenses of evolutionary approaches and 4 it suggests that the implementation and management of sustainable supply chains are context specific challenges and therefore theoretical managerial and policy generalizations are difficult to be achieved

the driving forces of process eco innovation and its impact on performance insights from slovenia this study endeavors to explore the driving forces of process eco innovation and its effect on company performance by adopting an integrative approach we focus on process eco innovation which pertains to technological and non technological solutions that result in a reduction of material and energy costs for companies in this regard the study sheds light on the drivers and outcomes of process eco innovation adoption using data collected from 223 slovenian companies the results reveal that certain determinants i e competitive pressure customer demand managerial environmental concern command and control instrument and economic incentive instrument are conducive to the deployment of process eco innovation empirical evidence reveals competitive pressure as the most influential driving force of process eco innovation followed by managerial environmental concern and customer demand effectiveness in spurring process eco innovation is also found to be a command and control instrument and an economic incentive instrument while expected benefits do not spur process eco innovation pertaining to the outcomes of process eco innovation adoption we can conclude that it pays to be eco process eco innovation is worthwhile in terms of company profitability growth and competitive benefits these findings suggest several courses of action for both policy makers and companies hence we conclude by providing implications for both

from cleaner production to sustainable development the role of academia cleaner production cp strategies are fundamentally concerned with operations environmental sustainability and maximization of waste reduction recycling and reuse at the enterprise level and are thus microeconomic in scope sustainable development sd however involves the design of integrated approaches that are capable of addressing environmental sustainability and waste while ensuring social and economic prosperity at the national or even global level implying a macroeconomic scope due to its philosophy broad scope and long term horizons sustainable development necessitates capacity building via advancement of sustainable societal patterns and the creation of a new set of visions paradigms policies methodological tools and applicable procedures the first and foremost step on this path is the development of human capital required to make such a transition this paper proposes the application of a methodology via which leaders in higher education could assess the necessity and the urgency for designing training programs that could assist with developing human capital needed to support sd the methodology evaluates the conditions and constraints that could control the effectiveness and ease of implementation of such programs at its core the proposed methodology utilizes expert judgment to assess importance of including cp and sd indicators listed in the questionnaire on the proposed academic programs during a pilot study which was conducted in the fall of 2013 at selected universities in the usa latin america and china experts evaluated a series of proposed cp infused academic programs according to a matrix consisting of sd indicators and under consideration of the norms culture political systems regulations resource availability and local regional and global economic development goals and objectives results of data analysis in the pilot study suggested that inclusion of the resource management rm topics in designing academic programs is the most preferred approach in all three different regions followed by development of programs that could cover topics in areas of human capital development hcd human system designs hsd and sustainable economic development and prosperity sedp quantitative analysis of the data indicated existence of two clusters of preferences for cp sd criteria one for in the americas including latin america and one for china

consuming durable goods when stock markets jump a strategic asset allocation approach in this paper we show the impact of considering jumps in the return process of risky assets when deciding how to invest and consume throughout time agents derive their utilities from consumption over time we consider an agent that invests in the financial market and in durable and perishable consumption goods assuming that there are costs for transacting the durable good we show that an agent who does not consider the possibility of jumps will make suboptimal decisions not only regarding the fraction of wealth invested in the stock market but also with respect to the timing for trading on the durable good furthermore we also show that jumps cause a non obvious asymmetric impact on the thresholds that lead the consumer to trade the durable good even when the jump distribution is symmetric

an exact solution to a dynamic portfolio choice problem under transactions costs the presence of any friction in financial markets qualitatively changes the nature of the optimization problem faced by an investor it requires one to either act or do nothing an issue which of course does not arise in frictionless situations the investor considered here accumulates wealth without consuming until some terminal point in time when he consumes all his objective is to maximize the expected utility derived from that terminal consumption we postpone the terminal point far into the future to obtain a stationary portfolio rule the portfolio policy is in the form of two control barriers between which portfolio proportions are allowed to fluctuate we show how to calculate them

long memory and level shifts in the volatility of stock market return indices there has been interest in the possibility of confusing long memory and structural changes in level and studies showed that when a short memory process is contaminated by level shifts the estimate of the fractional differencing parameter is biased upward and the autocovariances decay slowly we analyze the properties of the autocorrelation function the periodogram and the log periodogram estimate of the memory parameter when the level shift component is a mixture model our results explain many findings reported and uncover new features we confront our theoretical predictions using log squared returns as a proxy for the volatility of some assets returns including daily s p 500 returns over the period 1928 2002 the estimates follow patterns that would obtain if the process was short memory with level shifts instead of fractionally integrated a simple test is also proposed which reinforces this conclusion

european option pricing and hedging with both fixed and proportional transaction costs abstract in this paper we provide a systematic treatment of the utility based option pricing and hedging approach in markets with both fixed and proportional transaction costs we extend the framework developed by davis et al siam j control optim 31 1993 470 and formulate the option pricing and hedging problem we propose and implement a numerical procedure for computing option prices and corresponding optimal hedging strategies we present a careful analysis of the optimal hedging strategy and elaborate on important differences between the exact hedging strategy and the asymptotic hedging strategy of whalley and wilmott risk 7 1994 82 we provide a simulation analysis in order to compare the performance of the utility based hedging strategy against the asymptotic strategy and some other common strategies

determinants of environmental innovation new evidence from german panel data sources abstract in most cases empirical analyses of environmental innovations based on firm level data relied on surveys for one point in time these surveys allow for the inclusion of many explanatory variables such as different policy instruments or the influence of pressure groups but it is not possible to address the dynamic character of environmental innovations this paper uses two german panel databases the establishment panel of the institute for employment research iab and the mannheim innovation panel mip of the centre for european economic research zew to explore the determinants of environmental innovations the econometric estimations show that the improvement of the technological capabilities knowledge capital by r d triggers environmental innovations environmental regulation environmental management tools and general organizational changes also encourage environmental innovation a result that has also been postulated by the famous porter hypothesis

sustainable innovations in the corporate sector the empirical evidence from ibex 35 firms abstract sustainable innovation practices those which simultaneously contribute to environmental social and economic value creation have drawn increased attention from academics industry leaders and policy makers around the globe there is a general agreement that innovation is a very important part of the puzzle in achieving long term sustainability thus a critical question to be answered is what factors actually differentiate and appear to contribute to sustainable innovations si at the firm level this paper addresses the question by examining empirical evidence from the ibex 35 companies from the years 2010 2015 our results obtained from multivariate regression model indicate that the intensity of a firm s si activity is strongly and statistically significantly associated with the sector in which a given firm operates with a rising level of environmental footprint acting as a stimulant for innovation additionally firms characterized by higher net profit margins and returns on equity were also much more likely to introduce sis the findings also suggest that factors like size and age of a given company as well as level of competition in a sector in which it operates are not significant predictors for the implementation of sustainable innovations overall this study contributes to our understanding of the main characteristics of companies active in the area of si

option pricing and replication with transactions costs transactions costs invalidate the black scholes arbitrage argument for option pricing since continuous revision implies infinite trading discrete revision using black scholes deltas generates errors which are correlated with the market and do not approach zero with more frequent revision when transactions costs are included this paper develops a modified option replicating strategy which depends on the size of transactions costs and the frequency of revision hedging errors are uncorrelated with the market and approach zero with more frequent revision the technique permits calculation of the transactions costs of option replication and provides bounds on option prices

relationships between eco innovation and financial performance evidence from publicly traded companies in poland and hungary while the analysis of the linkages between eco innovative activities and financial performance is a popular topic in the existing body of literature many questions about these relationships especially in transition economies in central and eastern europe cee remain unanswered in this paper we explore four types of eco innovation product process market and sources of supply and their impact on accounting based measurers of financial performance using the data on polish and hungarian publicly traded companies from the years 2006 2013 our results indicated that eco innovators were generally characterized by higher returns on assets and equity and lower earnings retention additionally companies that introduce eco innovation were also significantly larger more likely to face lower financial risk exposure and more likely to possess greater free cash flow than conventional firms the findings suggest that strong asset and financial capabilities are relevant pre conditions for the development of eco innovativeness and that there is a need for environmental policy to create clear incentives for smes to increase activities in that area overall this study extends the understanding of financial performance implications of innovation by focussing on the area of environmental innovation

electricity wholesale market prices in europe convergence abstract this paper tests the hypothesis that the ongoing restructuring process in the european electricity sector has led to a common european market for electricity based on a principal component analysis pca of wholesale electricity prices in 2002 2006 we reject the assumption of full market integration for several pairs of countries the weaker hypothesis of bilateral convergence is accepted based on unit root tests kpss and adf and a convergence test based on filtered pairwise price relations this indicates that the efforts to develop a single european market for electricity were so far only partially successful we show that the daily auction prices of scarce cross border transmission capacities are insufficient to explain the persistence of international price differentials empirically our findings confirm the insufficiency of explicit capacity auctions as stated in the theoretical literature

optimal replication of options with transactions costs and trading restrictions this paper analyzes the strategy that minimizes the initial cost of replicating a contingent claim in a market with transactions costs and trading constraints the linear programming and two stage backward recursive models developed are applicable to the replication of convex as well as nonconvex payoffs and to a portfolio of options with different maturities the paper s formulation conveniently accounts for fixed and variable transactions costs lot size constraints and position limits on trading the article shows that in the presence of trading frictions it is no longer optimal to revise one s portfolio in each period at the optimum cash flows in excess of the desired ones may be generated the optimal policy trades off the curvature of the payoff that is generated against the terminal slack

integration and shock transmissions across european electricity forward markets abstract new results are presented relating to the integration of the french german british dutch and spanish power markets at day ahead week ahead one month ahead and two month ahead lead times overall there is evidence of market integration increasing over time despite an underlying inefficiency in each market with respect to the forward and spot price convergence the spatial analysis on a financial dimension is undertaken using causality tests cointegration and impulse response techniques for both price levels and volatilities in general we find less influence of the size and proximity of neighbouring markets than other studies more integration at baseload than peak and surprisingly less integration in forwards than spot prices

the message in north american energy prices how similar is the price behavior of north american natural gas fuel oil and power prices using current state of the art econometric methodology we explore the degree of shared trends across north american energy markets across these markets there appear to be effective arbitraging mechanisms for the price of natural gas and fuel oil but not for the price of electricity

a history of european electricity day ahead prices in this article we examine the development of day ahead prices in five european markets which became more connected over recent years where previous studies examined the convergence of price levels over time we focus on patterns in estimates for the parameters in a switching regimes model this makes it possible to distinguish between prices under normal market conditions and under non normal market conditions those market conditions that can cause extreme price spikes we expect that increased connectivity yields additional supply in the short term and therefore will reduce the impact of price spikes our results indicate that the impact of price spikes and volatility decreased over time that prices behave more random and that the parameter estimates between various connected markets seem to have converged between the belgian dutch french german and nordic day ahead markets over the years 2003 through 2010 these results can be explained by increased connectivity and improved liquidity

option hedging theory under transaction costs abstract the problem of option hedging in the presence of proportional transaction costs can be formulated as a singular stochastic control problem hodges and neuberger 1989 optimal replication of contingent claims under transactions costs review of futures markets 8 222 239 introduced an approach that is based on maximization of the expected utility of terminal wealth we develop a new algorithm to solve the corresponding singular stochastic control problem and introduce a new approach to option hedging which is closer in spirit to the pathwise replication of black and scholes 1973 the pricing of options and corporate liabilities journal of political economy 81 637 654 this new approach is based on minimization of a black scholes type measure of pathwise risk defined in terms of a market delta subject to an upper bound on the hedging cost we provide an efficient backward induction algorithm for the problem of cost constrained risk minimization whose associated singular stochastic control problem is shown to be equivalent to an optimal stopping problem this algorithm is then modified to solve the singular stochastic control problem associated with utility maximization which cannot be reduced to an optimal stopping problem we propose to choose an optimal parameter risk aversion coefficient or lagrange multiplier in either approach by minimizing the mean squared hedging error and demonstrate that with this best choice of the parameter both approaches have similar performance we also discuss the different notions of risk in both approaches and propose a volatility adjustment for the risk minimization approach which is analogous to that introduced by zakamouline 2006 european option pricing and hedging with both fixed and proportional transaction costs journal of economic dynamics and control 30 1 25 for the utility maximization approach thereby providing a unified treatment of both approaches