LOCAL RISK-MINIMIZATION UNDER MARKOV-MODULATED EXPONENTIAL LÉVY MODEL

Olivier Menoukeu-Pamen () and Romuald Momeya ()
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Olivier Menoukeu-Pamen: Institute for Financial and Actuarial Mathematics, Department of Mathematics, University of Liverpool, Liverpool, L69 7ZL, United Kingdom
Romuald Momeya: CIBC Asset Management Inc., 1000 de la Gauchetiere-Ouest Montreal, Quebec, H3B 4W5, Canada

International Journal of Theoretical and Applied Finance (IJTAF), 2015, vol. 18, issue 05, 1-24

Abstract: In this paper, the option hedging problem for a Markov-modulated exponential Lévy model is examined. We use the local risk-minimization approach to study optimal hedging strategies for Europeans derivatives when the price of the underlying is given by a regime-switching Lévy model. We use a martingale representation theorem result to construct an explicit local risk minimizing strategy.

Keywords: Local risk-minimization; partial information; Lévy process; regime-switching; hedging strategy; integral representation theorem (search for similar items in EconPapers)
Date: 2015
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DOI: 10.1142/S0219024915500338

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