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Continuous‐Time Portfolio Selection and Option Pricing under Risk‐Minimization Criterion in an Incomplete Market

Author

Listed:
  • Xinfeng Ruan
  • Wenli Zhu
  • Jiexiang Huang
  • Shuang Li

Abstract

We study option pricing with risk‐minimization criterion in an incomplete market where the dynamics of the risky underlying asset are governed by a jump diffusion equation. We obtain the Radon‐Nikodym derivative in the minimal martingale measure and a partial integrodifferential equation (PIDE) of European call option. In a special case, we get the exact solution for European call option by Fourier transformation methods. Finally, we employ the pricing kernel to calculate the optimal portfolio selection by martingale methods.

Suggested Citation

  • Xinfeng Ruan & Wenli Zhu & Jiexiang Huang & Shuang Li, 2013. "Continuous‐Time Portfolio Selection and Option Pricing under Risk‐Minimization Criterion in an Incomplete Market," Journal of Applied Mathematics, John Wiley & Sons, vol. 2013(1).
    • Handle: RePEc:wly:jnljam:v:2013:y:2013:i:1:n:175269
    DOI: 10.1155/2013/175269
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    References listed on IDEAS

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