Option hedging for semimartingales
We consider a general stochastic model of frictionless continuous trading. The price process is a semimartingale and the model is incomplete. Our objective is to hedge contingent claims by using trading strategies with a small riskiness. To this end, we introduce a notion of local R-minimality and show its equivalence to a new kind of stochastic optimality equation. This equation is solved by a Girsanov transformation to a minimal equivalent martingale measure. We prove existence and uniqueness of the solution, and we provide several examples. Our approach contains previous treatments of option trading as special cases.
If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
Volume (Year): 37 (1991)
Issue (Month): 2 (April)
|Contact details of provider:|| Web page: http://www.elsevier.com/wps/find/journaldescription.cws_home/505572/description#description|
|Order Information:|| Postal: http://http://www.elsevier.com/wps/find/supportfaq.cws_home/regional|
When requesting a correction, please mention this item's handle: RePEc:eee:spapps:v:37:y:1991:i:2:p:339-363. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Shamier, Wendy)
If references are entirely missing, you can add them using this form.