L^2-approximating pricing under restricted information

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Publication:985719



Abstract: We consider the mean-variance hedging problem under partial information in the case where the flow of observable events does not contain the full information on the underlying asset price process. We introduce a martingale equation of a new type and characterize the optimal strategy in terms of the solution of this equation. We give relations between this equation and backward stochastic differential equations for the value process of the problem.


The aim of the paper is to get an approximate price of an assets, according to minimize a variance criterium. The assets price is \[ S_t= S_0+ M_t+ \int^t_0 \lambda_u d\langle M\rangle_u,\;t\leq T, \] on a probability space \((\Omega,({\mathcal F}_t)_{0\leq t\leq T}, P)\), but only a subfiltration \(({\mathcal G}_t)_{0\leq t\leq T}\) is observed. Hypotheses are that \(\lambda\) and \(\langle M\rangle\) are \({\mathcal G}\)-predictable, \({\mathcal G}\)-martingales are local \({\mathcal F}\)-martingales, and there exists an equivalent probability measure \(Q= ZP\) such that \(S\) is a local \((Q,{\mathcal F})\)-martingale. Moreover there exists a constant \(C\) such that for any \({\mathcal F}\)-stopping time \(\tau\), \(E[{Z^2_T\over Z^2_\tau}/{\mathcal F}_r]\leq C\) (namely reverse Hölder condition). Under these hypotheses, given \(H\in L^2({\mathcal F}_T,P)\), the main result give an explicit expression of an optimal portfolio \(\pi^*\) which minimizes the application \[ x\mapsto E\Biggl[\Biggl(x+ \int^T_0 \pi_u dS_u- H\Biggr)^2\Biggr]. \] This portfolio is linked to a solution \((Y, \psi, N)\) of \[ dY_t= \pi^*_t\lambda_t d\langle M\rangle_t+ \psi_t dM_t+ dN_t,\quad Y_T= 0, \langle M,N\rangle= 0. \] Section 4 is devoted to the link with the authors previous results [SIAM J. Control Optim. 47, No. 5, 2381--2409 (2008; Zbl 1173.91393)]. Finally the main result is applied to a market with two assets, \((S,\eta)\), only price \(S\) being observed: an optimal portfolio is exhibited.











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