Mean-Variance Hedging Under Additional Market Information

F. Thierbach ()
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F. Thierbach: HSBC Trinkaus & Burkhardt KGaA, Königsallee 21–23, 40212 Düsseldorf, Germany

International Journal of Theoretical and Applied Finance (IJTAF), 2003, vol. 06, issue 06, 613-636

Abstract: In this paper we analyze the mean-variance hedging approach in an incomplete market under the assumption of additional market information, which is represented by a given, finite set of observed prices of non-attainable contingent claims. Due to no-arbitrage arguments, our set of investment opportunities increases and the set of possible equivalent martingale measures shrinks. Therefore, we obtain a modified mean-variance hedging problem, which takes into account the observed additional market information. Solving this we obtain an explicit description of the optimal hedging strategy and an admissible, constrained variance-optimal signed martingale measure, that generates both the approximation price and the observed option prices.

Keywords: Option pricing; mean variance hedging; incomplete markets; variance-optimal martingale measure (search for similar items in EconPapers)
Date: 2003
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Citations: View citations in EconPapers (1)

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DOI: 10.1142/S0219024903002092

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