Making Mean-Variance Hedging Implementable in a Partially Observable Market -with supplementary contents for stochastic interest rates-
ã€€ã€€ The mean-variance hedging (MVH) problem is studied in a partially observable market where the drift processes can only be inferred through the observation of asset or index processes. Although most of the literatures treat the MVH problem by the duality method, here we study a system consisting of three BSDEs derived by Mania and Tevzadze (2003) and Mania et.al.(2008) and try to provide more explicit expressions directly implementable by practitioners. Under the Bayesian and Kalman- Bucy frameworks, we find that a relevant BSDE can yield a semi-closed solution via a simple set of ODEs which allow a quick numerical evaluation. This renders remaining problems equivalent to solving European contingent claims under a new forward measure, and it is straightforward to obtain a forward looking non-sequential Monte Carlo simulation scheme. We also give a special example where the hedging position is available in a semi-closed form. For more generic setups, we provide explicit expressions of approximate hedging portfolio by an asymptotic expansion. These analytic expressions not only allow the hedgers to update the hedging positions in real time but also make a direct analysis of the terminal distribution of the hedged portfolio feasible by standard Monte Carlo simulation.
|Date of creation:||Jun 2013|
|Contact details of provider:|| Postal: Hongo 7-3-1, Bunkyo-ku, Tokyo 113-0033|
Web page: http://www.cirje.e.u-tokyo.ac.jp/index.html
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Akihiko Takahashi & Kohta Takehara & Masashi Toda, 2012. "A General Computation Scheme For A High-Order Asymptotic Expansion Method," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 15(06), pages 1-25.
- Michael Mania & Marina Santacroce, 2010. "Exponential utility maximization under partial information," Finance and Stochastics, Springer, vol. 14(3), pages 419-448, September.
- Masaaki Fujii & Akihiko Takahashi, 2011. "Analytical Approximation for Non-linear FBSDEs with Perturbation Scheme," Papers 1106.0123, arXiv.org, revised Jan 2012.
- Masaaki Fujii & Akihiko Takahashi, 2012. "ANALYTICAL APPROXIMATION FOR NON-LINEAR FBSDEs WITH PERTURBATION SCHEME," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 15(05), pages 1-24.
When requesting a correction, please mention this item's handle: RePEc:tky:fseres:2013cf891. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (CIRJE administrative office)
If references are entirely missing, you can add them using this form.