On the structure of general mean-variance hedging strategies
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Publication:2373572
Abstract: We provide a new characterization of mean-variance hedging strategies in a general semimartingale market. The key point is the introduction of a new probability measure which turns the dynamic asset allocation problem into a myopic one. The minimal martingale measure relative to coincides with the variance-optimal martingale measure relative to the original probability measure .
The purpose of the paper is to provide a deeper understanding of the structure of the mean-variance hedging problem in a general semimartingale context. The authors define a notion of admissibility which ensures the existence of an optimal hedge. The measure change alluded to above and related objects such as opportunity process, adjustment process, opportunity-neutral measure and variance-optimal signed martingale measure are introduced. The key point is the introduction of a new probability measure \(P^{\star}\) which turns the dynamic asset allocation problem into a myopic one. It is proved that the minimal martingale measure relative to \(P^{\star}\) coincides with the variance-optimal martingale measure relative to the original probability measure \(P\).
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