Local risk-minimization under restricted information on asset prices

DOI10.1214/EJP.V20-3204zbMATH Open1329.60112arXiv1312.4385OpenAlexW2133095951MaRDI QIDQ894154FDOQ894154

Alessandra Cretarola, Katia Colaneri, Claudia Ceci

Publication date: 27 November 2015

Published in: Electronic Journal of Probability (Search for Journal in Brave)

Abstract: In this paper we investigate the local risk-minimization approach for a semimartingale financial market where there are restrictions on the available information to agents who can observe at least the asset prices. We characterize the optimal strategy in terms of suitable decompositions of a given contingent claim, with respect to a filtration representing the information level, even in presence of jumps. Finally, we discuss some practical examples in a Markovian framework and show that the computation of the optimal strategy leads to filtering problems under the real-world probability measure and under the minimalmartingale measure.

Full work available at URL: https://arxiv.org/abs/1312.4385

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zbMATH Keywords

filteringpartial informationlocal risk-minimizationMarkovian processessemimartingale financial market

Mathematics Subject Classification ID

Diffusion processes (60J60) Generalizations of martingales (60G48) Continuous-time Markov processes on general state spaces (60J25)

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• LOCAL RISK MINIMIZATION OF CONTINGENT CLAIMS SIMULTANEOUSLY EXPOSED TO ENDOGENOUS AND EXOGENOUS DEFAULT TIMES
• Pricing and hedging of general rating-sensitive claims in a jump-diffusion market model in the presence of stochastic factors
• Numerical analysis of a time discretized method for nonlinear filtering problem with Lévy process observations
• Local risk minimization and numéraire
• Locally risk-minimizing hedging of counterparty risk for portfolio of credit derivatives
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• The Föllmer–Schweizer decomposition under incomplete information
• Hedging the Risk of Delayed Data in Defaultable Markets
• Minimization of locally-quadratic risk on financial markets with two parameters

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