Stability and asymptotic analysis of the F\"ollmer-Schweizer decomposition on a finite probability space

Sarah Boese, Tracy Cui, Samuel Johnston, Gianmarco Molino and Oleksii Mostovyi

Papers from arXiv.org

Abstract: First, we consider the problem of hedging in complete binomial models. Using the discrete-time F\"ollmer-Schweizer decomposition, we demonstrate the equivalence of the backward induction and sequential regression approaches. Second, in incomplete trinomial models, we examine the extension of the sequential regression approach for approximation of contingent claims. Then, on a finite probability space, we investigate stability of the discrete-time F\"ollmer-Schweizer decomposition with respect to perturbations of the stock price dynamics and, finally, perform its asymptotic analysis under simultaneous perturbations of the drift and volatility of the underlying discounted stock price process, where we prove stability and obtain explicit formulas for the leading order correction terms.

Date: 2020-02, Revised 2020-06
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Citations: View citations in EconPapers (1)

Published in Involve 13 (2020) 607-623

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Persistent link: https://EconPapers.repec.org/RePEc:arx:papers:2002.03286

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