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The Föllmer-Schweizer decomposition: Comparison and description

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  • Choulli, Tahir
  • Vandaele, Nele
  • Vanmaele, Michèle

Abstract

This paper proposes two main contributions concerning the Föllmer-Schweizer decomposition (called hereafter the FS-decomposition). First we completely elaborate the relationship between this decomposition and the Galtchouk-Kunita-Watanabe decomposition under the minimal martingale measure. The difference between these two decompositions is highlighted in a very practical example, and the martingale tools that enhance this difference are illustrated in the semimartingale framework as well. The second main contribution focuses on the description of the FS-decomposition using the predictable characteristics.

Suggested Citation

  • Choulli, Tahir & Vandaele, Nele & Vanmaele, Michèle, 2010. "The Föllmer-Schweizer decomposition: Comparison and description," Stochastic Processes and their Applications, Elsevier, vol. 120(6), pages 853-872, June.
    • Handle: RePEc:eee:spapps:v:120:y:2010:i:6:p:853-872
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    References listed on IDEAS

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    Cited by:

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    3. Pansera, Jérôme, 2012. "Discrete-time local risk minimization of payment processes and applications to equity-linked life-insurance contracts," Insurance: Mathematics and Economics, Elsevier, vol. 50(1), pages 1-11.
    4. Lijun Bo & Agostino Capponi & Claudia Ceci, 2017. "Risk-Minimizing Hedging of Counterparty Risk," Papers 1709.01115, arXiv.org.
    5. Okhrati, Ramin & Balbás, Alejandro & Garrido, José, 2014. "Hedging of defaultable claims in a structural model using a locally risk-minimizing approach," Stochastic Processes and their Applications, Elsevier, vol. 124(9), pages 2868-2891.
    6. Christoph Czichowsky, 2012. "Time-Consistent Mean-Variance Portfolio Selection in Discrete and Continuous Time," Papers 1205.4748, arXiv.org.
    7. Christoph Czichowsky, 2013. "Time-consistent mean-variance portfolio selection in discrete and continuous time," Finance and Stochastics, Springer, vol. 17(2), pages 227-271, April.
    8. Ceci, Claudia & Colaneri, Katia & Cretarola, Alessandra, 2017. "Unit-linked life insurance policies: Optimal hedging in partially observable market models," Insurance: Mathematics and Economics, Elsevier, vol. 76(C), pages 149-163.
    9. Oleksii Mostovyi & Mihai Sîrbu, 2019. "Sensitivity analysis of the utility maximisation problem with respect to model perturbations," Finance and Stochastics, Springer, vol. 23(3), pages 595-640, July.

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