English

Variance-optimal hedging for processes with stationary independent increments

Probability 2008-12-10 v1 Computational Finance

Abstract

We determine the variance-optimal hedge when the logarithm of the underlying price follows a process with stationary independent increments in discrete or continuous time. Although the general solution to this problem is known as backward recursion or backward stochastic differential equation, we show that for this class of processes the optimal endowment and strategy can be expressed more explicitly. The corresponding formulas involve the moment, respectively, cumulant generating function of the underlying process and a Laplace- or Fourier-type representation of the contingent claim. An example illustrates that our formulas are fast and easy to evaluate numerically.

Keywords

Cite

@article{arxiv.math/0607112,
  title  = {Variance-optimal hedging for processes with stationary independent increments},
  author = {Friedrich Hubalek and Jan Kallsen and Leszek Krawczyk},
  journal= {arXiv preprint arXiv:math/0607112},
  year   = {2008}
}

Comments

Published at http://dx.doi.org/10.1214/105051606000000178 in the Annals of Applied Probability (http://www.imstat.org/aap/) by the Institute of Mathematical Statistics (http://www.imstat.org)