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Mean-Variance Hedging Under Additional Market Information

Author

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  • F. Thierbach

    (HSBC Trinkaus & Burkhardt KGaA, Königsallee 21–23, 40212 Düsseldorf, Germany)

Abstract

In this paper we analyze the mean-variance hedging approach in an incomplete market under the assumption of additional market information, which is represented by a given, finite set of observed prices of non-attainable contingent claims. Due to no-arbitrage arguments, our set of investment opportunities increases and the set of possible equivalent martingale measures shrinks. Therefore, we obtain a modified mean-variance hedging problem, which takes into account the observed additional market information. Solving this we obtain an explicit description of the optimal hedging strategy and an admissible, constrained variance-optimal signed martingale measure, that generates both the approximation price and the observed option prices.

Suggested Citation

  • F. Thierbach, 2003. "Mean-Variance Hedging Under Additional Market Information," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 6(06), pages 613-636.
    • Handle: RePEc:wsi:ijtafx:v:06:y:2003:i:06:n:s0219024903002092
    DOI: 10.1142/S0219024903002092
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    Cited by:

    1. Luciano Campi, 2004. "Arbitrage and completeness in financial markets with given N-dimensional distributions," Decisions in Economics and Finance, Springer;Associazione per la Matematica, vol. 27(1), pages 57-80, August.

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