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On mean-variance hedging under partial observations and terminal wealth constraints

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  • Vitalii Makogin
  • Alexander Melnikov
  • Yuliya Mishura

Abstract

In the paper, a mean-square minimization problem under terminal wealth constraint with partial observations is studied. The problem is naturally connected to the mean-variance hedging problem under incomplete information. A new approach to solving this problem is proposed. The paper provides a solution when the underlying pricing process is a square-integrable semimartingale. The proposed method for the study is based on the martingale representation. In special cases, the Clark-Ocone representation can be used to obtain explicit solutions. The results and the method are illustrated and supported by example with two correlated geometric Brownian motions.

Suggested Citation

  • Vitalii Makogin & Alexander Melnikov & Yuliya Mishura, 2017. "On mean-variance hedging under partial observations and terminal wealth constraints," Papers 1704.06550, arXiv.org.
    • Handle: RePEc:arx:papers:1704.06550
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    File URL: http://arxiv.org/pdf/1704.06550
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    Cited by:

    1. Martin Schweizer & Danijel Zivoi & Mario Šikić, 2018. "Dynamic Mean–Variance Optimization Problems With Deterministic Information," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 21(02), pages 1-38, March.

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