Mean-Variance Hedging Under Partial Information

DOI10.1137/070700061MaRDI QIDQ3399248zbMATH OpenOpenAlexFDO

Authors M. Mania, R. Tevzadze, Teimuraz Toronjadze

Publication date 29 September 2009

Published in SIAM Journal on Control and Optimization (Search for Journal in Brave)

Full work available at URL https://arxiv.org/abs/math/0703424

zbMATH Keywords

backward stochastic differential equationpartial informationincomplete marketsmean-variance hedgingsemimartingale market model

Mathematics Subject Classification ID

Dynamic programming (90C39) Applications of stochastic analysis (to PDEs, etc.) (60H30)

Abstract: We consider the mean-variance hedging problem under partial Information. The underlying asset price process follows a continuous semimartingale and strategies have to be constructed when only part of the information in the market is available. We show that the initial mean variance hedging problem is equivalent to a new mean variance hedging problem with an additional correction term, which is formulated in terms of observable processes. We prove that the value process of the reduced problem is a square trinomial with coefficients satisfying a triangle system of backward stochastic differential equations and the filtered wealth process of the optimal hedging strategy is characterized as a solution of a linear forward equation.

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(23)

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