Stability and asymptotic analysis of the Föllmer-Schweizer decomposition on a finite probability space

DOI10.2140/INVOLVE.2020.13.607zbMATH Open1470.60108arXiv2002.03286OpenAlexW3109406944MaRDI QIDQ2036670FDOQ2036670

Sarah Boese, Gianmarco Molino, Oleksii Mostovyi, Tracy Cui, Samuel Johnston

Publication date: 30 June 2021

Published in: Involve (Search for Journal in Brave)

Abstract: First, we consider the problem of hedging in complete binomial models. Using the discrete-time F"ollmer-Schweizer decomposition, we demonstrate the equivalence of the backward induction and sequential regression approaches. Second, in incomplete trinomial models, we examine the extension of the sequential regression approach for approximation of contingent claims. Then, on a finite probability space, we investigate stability of the discrete-time F"ollmer-Schweizer decomposition with respect to perturbations of the stock price dynamics and, finally, perform its asymptotic analysis under simultaneous perturbations of the drift and volatility of the underlying discounted stock price process, where we prove stability and obtain explicit formulas for the leading order correction terms.

Full work available at URL: https://arxiv.org/abs/2002.03286

zbMATH Keywords

stabilityasymptotic analysissimultaneous perturbations of the drift and volatilityFöllmer-Schweizer decomposition

Mathematics Subject Classification ID

Derivative securities (option pricing, hedging, etc.) (91G20) Portfolio theory (91G10) Optimal stochastic control (93E20) Least squares and related methods for stochastic control systems (93E24) General theory of stochastic processes (60G07)

Cites Work

• Approximating random variables by stochastic integrals
• Sensitivity analysis of utility-based prices and risk-tolerance wealth processes
• Variance-Optimal Hedging in Discrete Time
• On the two-times differentiability of the value functions in the problem of optimal investment in incomplete markets
• Föllmer-Schweizer decomposition and mean-variance hedging for general claims
• Asymptotic analysis of the expected utility maximization problem with respect to perturbations of the numéraire

Cited In (3)

• The information premium on a finite probability space
• Fair pricing and hedging under small perturbations of the numéraire on a finite probability space
• The Föllmer–Schweizer decomposition under incomplete information

This page was built for publication: Stability and asymptotic analysis of the Föllmer-Schweizer decomposition on a finite probability space

Report a bug (only for logged in users!)Click here to report a bug for this page (MaRDI item Q2036670)