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Local Risk-Minimization Under Markov-Modulated Exponential Lévy Model

Author

Listed:
  • OLIVIER MENOUKEU-PAMEN

    (Institute for Financial and Actuarial Mathematics, Department of Mathematics, University of Liverpool, Liverpool, L69 7ZL, United Kingdom)

  • ROMUALD MOMEYA

    (CIBC Asset Management Inc., 1000 de la Gauchetiere-Ouest Montreal, Quebec, H3B 4W5, Canada)

Abstract

In this paper, the option hedging problem for a Markov-modulated exponential Lévy model is examined. We use the local risk-minimization approach to study optimal hedging strategies for Europeans derivatives when the price of the underlying is given by a regime-switching Lévy model. We use a martingale representation theorem result to construct an explicit local risk minimizing strategy.

Suggested Citation

  • Olivier Menoukeu-Pamen & Romuald Momeya, 2015. "Local Risk-Minimization Under Markov-Modulated Exponential Lévy Model," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 18(05), pages 1-24.
    • Handle: RePEc:wsi:ijtafx:v:18:y:2015:i:05:n:s0219024915500338
    DOI: 10.1142/S0219024915500338
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    References listed on IDEAS

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    1. Claudia Ceci & Katia Colaneri & Alessandra Cretarola, 2013. "Local risk-minimization under restricted information to asset prices," Papers 1312.4385, arXiv.org, revised Nov 2014.
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