Variance-optimal hedging for processes with stationary independent increments

DOI10.1214/105051606000000178zbMATH Open1189.91206arXivmath/0607112OpenAlexW3100763845MaRDI QIDQ997954FDOQ997954

Authors: Friedrich Hubalek, Leszek Krawczyk, Jan Kallsen 

Publication date: 8 August 2007

Published in: The Annals of Applied Probability (Search for Journal in Brave)

Abstract: We determine the variance-optimal hedge when the logarithm of the underlying price follows a process with stationary independent increments in discrete or continuous time. Although the general solution to this problem is known as backward recursion or backward stochastic differential equation, we show that for this class of processes the optimal endowment and strategy can be expressed more explicitly. The corresponding formulas involve the moment, respectively, cumulant generating function of the underlying process and a Laplace- or Fourier-type representation of the contingent claim. An example illustrates that our formulas are fast and easy to evaluate numerically.

Full work available at URL: https://arxiv.org/abs/math/0607112

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zbMATH Keywords

Laplace transformvariance-optimal hedgingLévy processesFöllmer-Schweizer decomposition

Mathematics Subject Classification ID

Processes with independent increments; Lévy processes (60G51) Derivative securities (option pricing, hedging, etc.) (91G20) Laplace transform (44A10) Stochastic integrals (60H05) Applications of stochastic analysis (to PDEs, etc.) (60H30)

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