The Föllmer-Schweizer decomposition: comparison and description (Q981002)

The authors elaborate upon the relationship between the Föllmer-Schweizer decomposition and the Galtchouk-Kunita-Watanbe decomposition under the minimal martingale measure. The key difference between these two decompositions is exhibited through an example. The Föllmer-Schweizer decomposition relates to the local risk-minimization concept. The authors cite many references describing the FS-decomposition, including one by \textit{J. P. Ansel} and \textit{C. Stricker} [Ann. Inst. Henri Poincaré, Probab. Stat. 28, 375--392 (1992; Zbl 0772.60033)]. If the price of the discounted risky asset is a martingale, the decomposition coincides with the Galtchouk-Kunita-Watanbe decomposition. The FS-decomposition and GKW-decomposition coincide under minimal martingale measure. This relationship breaks down when jumps are involved. The main difference between the two decompositions relates to the orthogonality and local martingales. Section 2 presents the preliminary material while the third section compares the descriptions. The final section provides a description of the FS-decomposition in terms of a discounted stock price process.