Risk-minimizing hedging strategies under restricted information: The case of stochastic volatility models observable only at discrete random times

Risk-minimizing hedging strategies under restricted information: The case of stochastic volatility models observable only at discrete random times

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Article ID: iaor20002170
Country: Germany
Volume: 50
Issue: 2
Start Page Number: 339
End Page Number: 350
Publication Date: Jan 1999
Journal: Mathematical Methods of Operations Research (Heidelberg)
Authors: ,
Abstract:

We consider a market where the price of the risky asset follows a stochastic volatility model, but can be observed only at discrete random time points. We determine a local risk minimizing hedging strategy, assuming that the information of the agent is restricted to the observations of the price at its random jump times. Stochastic filtering also comes into play when computing the hedging strategy in the given situation of restricted information.

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