Convex Duality in Mean Variance Hedging Under Convex Trading Constraints

Christoph Czichowsky and Martin Schweizer
Additional contact information
Christoph Czichowsky: Vienna University of Technology
Martin Schweizer: ETH Zürich

No 12-24, Swiss Finance Institute Research Paper Series from Swiss Finance Institute

Abstract: We study mean-variance hedging under portfolio constraints in a general semimartingale model. The constraints are formulated via predictable correspondences, meaning that the trading strategy is restricted to lie in a closed convex set which may depend on the state and time in a predictable way. To obtain the existence of a solution, we first establish the closedness in L2 of the space of all gains from trade (i.e., the terminal values of stochastic integrals with respect to the price process of the underlying assets). This is a first main contribution which enables us to tackle the problem in a systematic and unified way. In addition, using the closedness allows us to explain and generalise in a systematic way the convex duality results obtained previously by other authors via ad hoc methods in specific frameworks.

Keywords: mean-variance hedging; constraints; stochastic integrals; convex duality (search for similar items in EconPapers)
JEL-codes: C60 G10 G11 (search for similar items in EconPapers)
Pages: 37 pages
Date: 2012-06
References: Add references at CitEc
Citations: View citations in EconPapers (2)

Downloads: (external link)
http://ssrn.com/abstract=2083051 (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:chf:rpseri:rp1224

Access Statistics for this paper

More papers in Swiss Finance Institute Research Paper Series from Swiss Finance Institute Contact information at EDIRC.
Bibliographic data for series maintained by Ridima Mittal ().