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$F$-divergence minimal equivalent martingale measures and optimal portfolios for exponential Levy models with a change-point

  • S. Cawston
  • L. Vostrikova
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    We study exponential Levy models with change-point which is a random variable, independent from initial Levy processes. On canonical space with initially enlarged filtration we describe all equivalent martingale measures for change-point model and we give the conditions for the existence of f-divergence minimal equivalent martingale measure. Using the connection between utility maximisation and $f$-divergence minimisation, we obtain a general formula for optimal strategy in change-point case for initially enlarged filtration and also for progressively enlarged filtration in the case of exponential utility. We illustrate our results considering the Black-Scholes model with change-point.

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    File URL: http://arxiv.org/pdf/1004.3525
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    Paper provided by arXiv.org in its series Papers with number 1004.3525.

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    Date of creation: Apr 2010
    Date of revision: Jun 2011
    Handle: RePEc:arx:papers:1004.3525
    Contact details of provider: Web page: http://arxiv.org/

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    1. Hélyette Geman & Dilip B. Madan & Marc Yor, 2001. "Time Changes for Lévy Processes," Mathematical Finance, Wiley Blackwell, vol. 11(1), pages 79-96.
    2. Jan Kallsen, 2000. "Optimal portfolios for exponential Lévy processes," Mathematical Methods of Operations Research, Springer, vol. 51(3), pages 357-374, 08.
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    4. Friedrich Hubalek & Carlo Sgarra, 2006. "Esscher transforms and the minimal entropy martingale measure for exponential Levy models," Quantitative Finance, Taylor & Francis Journals, vol. 6(2), pages 125-145.
    5. Tahir Choulli & Christophe Stricker, 2005. "Minimal Entropy-Hellinger Martingale Measure In Incomplete Markets," Mathematical Finance, Wiley Blackwell, vol. 15(3), pages 465-490.
    6. Bayraktar, Erhan & Dayanik, Savas & Karatzas, Ioannis, 2005. "The standard Poisson disorder problem revisited," Stochastic Processes and their Applications, Elsevier, vol. 115(9), pages 1437-1450, September.
    7. Schweizer, Martin, 1999. "A guided tour through quadratic hedging approaches," SFB 373 Discussion Papers 1999,96, Humboldt University of Berlin, Interdisciplinary Research Project 373: Quantification and Simulation of Economic Processes.
    8. Marc Yor & Dilip B. Madan & Hélyette Geman, 2002. "Stochastic volatility, jumps and hidden time changes," Finance and Stochastics, Springer, vol. 6(1), pages 63-90.
    9. repec:spr:compst:v:51:y:2000:i:3:p:357-374 is not listed on IDEAS
    10. Tahir Choulli & Christophe Stricker & Jia Li, 2007. "Minimal Hellinger martingale measures of order q," Finance and Stochastics, Springer, vol. 11(3), pages 399-427, July.
    11. Kavtaradze, T. & Lazrieva, N. & Mania, M. & Muliere, P., 2007. "A Bayesian-martingale approach to the general disorder problem," Stochastic Processes and their Applications, Elsevier, vol. 117(8), pages 1093-1120, August.
    12. Thomas Goll & Ludger Rüschendorf, 2001. "Minimax and minimal distance martingale measures and their relationship to portfolio optimization," Finance and Stochastics, Springer, vol. 5(4), pages 557-581.
    13. Geman, Hélyette & Carr, Peter & Madan, Dilip B. & Yor, Marc, 2003. "Stochastic Volatility for Levy Processes," Economics Papers from University Paris Dauphine 123456789/1392, Paris Dauphine University.
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