MINIMAL VARIANCE HEDGING FOR INSIDER TRADING

Francesca Biagini () and Bernt Øksendal ()
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Francesca Biagini: Department of Mathematics, LMU, Theresienstr. 39, D-80333 Munich, Germany
Bernt Øksendal: Center of Mathematics for Applications (CMA), Department of Mathematics, University of Oslo, Box 1053, Blindern, N-0316 Oslo, Norway;

International Journal of Theoretical and Applied Finance (IJTAF), 2006, vol. 09, issue 08, 1351-1375

Abstract: In this paper, we first study the problem of minimal hedging for an insider trader in incomplete markets. We use the forward integral in order to model the insider portfolio and consider a general larger filtration. We characterize the optimal strategy in terms of a martingale condition. In the second part we focus on a problem of mean-variance hedging where the insider tries to minimize the variance of his wealth at time T given that this wealth has a fixed expected value A. We solve this problem for an initial enlargement of filtration by providing an explicit solution.

Keywords: Forward integral; Malliavin calculus; minimal variance; insider hedging; mean-variance insider hedging (search for similar items in EconPapers)
Date: 2006
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Citations: View citations in EconPapers (8)

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DOI: 10.1142/S0219024906003998

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