A Guided Tour through Quadratic Hedging Approaches
MARTIN P. SCHWEIZER
Abstract
MARTIN P. SCHWEIZER
Abstract
This paper gives an overview of results and developments in the area of pricing and hedging contingent claims in an incomplete market by means of a quadratic criterion. We first present the approach of risk-minimization in the case where the underlying discounted price process X is a local martingale. We then discuss the extension to local risk-minimization when X is a semimartingale and explain the relations to the Föllmer-Schweizer decomposition and the minimal martin-gale measure. Finally we study mean-variance hedging, the variance-optimal martingale measure and the connections to closedness properties of spaces of stochastic integrals.
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This paper gives an overview of results and developments in the area of pricing and hedging contingent claims in an incomplete market by means of a quadratic criterion. We first present the approach of risk-minimization in the case where the underlying discounted price process X is a local martingale. We then discuss the extension to local risk-minimization when X is a semimartingale and explain the relations to the Föllmer-Schweizer decomposition and the minimal martin-gale measure. Finally we study mean-variance hedging, the variance-optimal martingale measure and the connections to closedness properties of spaces of stochastic integrals.
Key concepts: Quadratic equation, Mathematical economics, Computer science, Economics, Econometrics, Mathematics, Mathematical optimization, Geometry