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Structural Models under Additional Information

  • Tahir Choulli
  • Jun Deng
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    It has been understood that the ``local" existence of the Markowitz' optimal portfolio or the solution to the local risk minimization problem is guaranteed by some specific mathematical structures on the underlying assets price processes (called ``Structure Conditions" in the literature). In this paper, we consider a semi-martingale market model (initial market model) fulfilling these structures, and an arbitrary random time that is not adapted to the flow of the ``public" information. By adding additional uncertainty to the initial market model, via this random time, those structures may fail. Our aim is to address the question of how this random time will affect these structures from different perspectives. Our analysis allowed us to conclude that under some mild assumptions on the market model and the random time, these structures will remain valid on the one hand. Furthermore, we provide two examples illustrating the importance of these assumptions. On the other hand, we describe the random time models for which these structure conditions are preserved for any market model. These results are elaborated separately for the two contexts of stopping with random time and incorporating totally a specific class of random times respectively.

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    File URL: http://arxiv.org/pdf/1403.3459
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    Paper provided by arXiv.org in its series Papers with number 1403.3459.

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    Date of creation: Mar 2014
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    Handle: RePEc:arx:papers:1403.3459
    Contact details of provider: Web page: http://arxiv.org/

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    1. David Heath & Eckhard Platen & Martin Schweizer, 2001. "A Comparison of Two Quadratic Approaches to Hedging in Incomplete Markets," Mathematical Finance, Wiley Blackwell, vol. 11(4), pages 385-413.
    2. Francesca Biagini & Paolo Guasoni & Maurizio Pratelli, 2000. "Mean-Variance Hedging for Stochastic Volatility Models," Mathematical Finance, Wiley Blackwell, vol. 10(2), pages 109-123.
    3. Allen, Beth, 1990. "Information as an Economic Commodity," American Economic Review, American Economic Association, vol. 80(2), pages 268-73, May.
    4. Arturo Kohatsu-Higa & Agn├Ęs Sulem, 2006. "Utility Maximization In An Insider Influenced Market," Mathematical Finance, Wiley Blackwell, vol. 16(1), pages 153-179.
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