On mean-variance hedging under partial observations and terminal wealth constraints

DOI10.1142/S0219024917500315zbMATH Open1396.91695arXiv1704.06550OpenAlexW2611115694MaRDI QIDQ5357516FDOQ5357516

Authors: Vitalii Makogin, Alexander Melnikov, Yuliya S. Mishura 

Publication date: 8 September 2017

Published in: International Journal of Theoretical and Applied Finance (Search for Journal in Brave)

Abstract: In the paper, a mean-square minimization problem under terminal wealth constraint with partial observations is studied. The problem is naturally connected to the mean-variance hedging problem under incomplete information. A new approach to solving this problem is proposed. The paper provides a solution when the underlying pricing process is a square-integrable semimartingale. The proposed method for the study is based on the martingale representation. In special cases, the Clark-Ocone representation can be used to obtain explicit solutions. The results and the method are illustrated and supported by example with two correlated geometric Brownian motions.

Full work available at URL: https://arxiv.org/abs/1704.06550

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zbMATH Keywords

geometric Brownian motionpartial informationmean-variance hedgingstochastic derivativeClark-Ocone representationobservable and unobservable contingent claimssemi-martingale approach

Mathematics Subject Classification ID

Signal detection and filtering (aspects of stochastic processes) (60G35) Portfolio theory (91G10) Brownian motion (60J65) Generalizations of martingales (60G48)

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Cited In (6)

• HEDGING UNDER GAMMA CONSTRAINTS BY OPTIMAL STOPPING AND FACE-LIFTING
• Making mean-variance hedging implementable in a partially observable market
• Mean-Variance Hedging Under Partial Information
• MEAN-VARIANCE HEDGING FOR PARTIALLY OBSERVED DRIFT PROCESSES
• DYNAMIC MEAN–VARIANCE OPTIMIZATION PROBLEMS WITH DETERMINISTIC INFORMATION
• A comonotonic approximation to optimal terminal wealth under a multivariate Merton model with correlated jump risk

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