Local Risk-Minimization under the Benchmark Approach

Francesca Biagini, Alessandra Cretarola and Eckhard Platen ()
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Francesca Biagini: Department of Mathematics, LMU

No 319, Research Paper Series from Quantitative Finance Research Centre, University of Technology, Sydney

Abstract: We study the pricing and hedging of derivatives in incomplete financial markets by considering the local risk-minimization method in the context of the benchmark approach, which will be called benchmarked local risk-minimization. We show that the proposed benchmarked local risk-minimization allows to handle under extremely weak assumptions a much richer modeling world than the classical methodology.

Keywords: local risk-minimization; Follmer-Schweizer decomposion; Galtchouck-Kunita-Watanabe decomposion; numeraire portfolio; benchmark approach; real world pricing; martingale representation (search for similar items in EconPapers)
Pages: 34 pages
Date: 2012-12-01
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Citations: View citations in EconPapers (17)

Published as: Biagini, F., Cretarola, A. and Platen, E., 2014, "Local Risk-Minimization under the Benchmark Approach", Mathematics and Financial Economics, 8(2), 109-134.

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https://www.uts.edu.au/sites/default/files/qfr-archive-03/QFR-rp319.pdf (application/pdf)

Related works:
Working Paper: Local Risk-Minimization under the Benchmark Approach (2012)
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