Mean Variance Hedging in a General Jump Model

Michael Kohlmann, Dewen Xiong and Zhongxing Ye

Applied Mathematical Finance, 2010, vol. 17, issue 1, 29-57

Abstract: We consider the mean-variance hedging of a contingent claim H when the discounted price process S is an [image omitted]-valued quasi-left continuous semimartingale with bounded jumps. We relate the variance-optimal martingale measure (VOMM) to a backward semimartingale equation (BSE) and show that the VOMM is equivalent to the original measure P if and only if the BSE has a solution. For a general contingent claim, we derive an explicit solution of the optimal strategy and the optimal cost of the mean-variance hedging by means of another BSE and an appropriate predictable process δ

Keywords: Mean-variance hedging; variance-optimal martingale measure; backward semimartingale equations (search for similar items in EconPapers)
Date: 2010
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Citations: View citations in EconPapers (2)

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DOI: 10.1080/13504860903075605

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