Approximation of stochastic integrals with jumps via weighted BMO approach

MaRDI QIDQ6348402zbMATH OpenFDO

Authors Nguyen Tran Thuan

Publication date 4 September 2020

Abstract: This article investigates discrete-time approximations of stochastic integrals driven by semimartingales with jumps via weighted bounded mean oscillation (BMO) approach. This approach enables $L_p$-estimates, $pin(2,infty)$, for the approximation error depending on the weight, and it allows a change of the underlying measure which leaves the error estimates unchanged. To take advantage of this approach, we propose a new approximation scheme obtained from a correction for the Riemann approximation based on tracking jumps of the underlying semimartingale. We also discuss a way to optimize the approximation rate by adapting the discretization times to the setting. When the small jump activity of the semimartingale behaves like an $alpha$-stable process with $alphain(1,2)$, our scheme achieves under a regular regime the same convergence rate for the error as in Rosenbaum and Tankov [ extit{Ann. Appl. Probab.} extbf{24} (2014) 1002--1048]. Moreover, our approach extends to the case $alphain(0,1]$ and to the $L_p$-setting which are not treated there. As an application, we apply the methods in the special case where the semimartingale is an exponential L'evy process to mean-variance hedging of European type options.

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