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A new proposition on the martingale representation theorem and on the approximate hedging of contingent claim in mean-variance criterion

Author

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  • André Farber
  • Van Huu Nguyen
  • Quan-Hoang Vuong

Abstract

In this work we revisit the problem of the hedging of contingent claim using mean-square criterion. We prove that in incomplete market, some probability measure can be identified so that becomes -martingale under .This is in fact a new proposition on the martingale representation theorem. The new results also identify a weight function that serves to be an approximation to the Radon-Nikodým derivative of the unique neutral martingale measure.

Suggested Citation

  • André Farber & Van Huu Nguyen & Quan-Hoang Vuong, 2006. "A new proposition on the martingale representation theorem and on the approximate hedging of contingent claim in mean-variance criterion," Working Papers CEB 06-004.RS, ULB -- Universite Libre de Bruxelles.
  • Handle: RePEc:sol:wpaper:06-004
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    More about this item

    Keywords

    Martingale representation theorem; Hedging; Contingent claim; Mean-variance.;

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing

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