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The F\"ollmer-Schweizer decomposition under incomplete information

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  • Claudia Ceci
  • Katia Colaneri
  • Alessandra Cretarola

Abstract

In this paper we study the F\"ollmer-Schweizer decomposition of a square integrable random variable $\xi$ with respect to a given semimartingale $S$ under restricted information. Thanks to the relationship between this decomposition and that of the projection of $\xi$ with respect to the given information flow, we characterize the integrand appearing in the F\"ollmer-Schweizer decomposition under partial information in the general case where $\xi$ is not necessarily adapted to the available information level. For partially observable Markovian models where the dynamics of $S$ depends on an unobservable stochastic factor $X$, we show how to compute the decomposition by means of filtering problems involving functions defined on an infinite-dimensional space. Moreover, in the case of a partially observed jump-diffusion model where $X$ is described by a pure jump process taking values in a finite dimensional space, we compute explicitly the integrand in the F\"ollmer-Schweizer decomposition by working with finite dimensional filters.

Suggested Citation

  • Claudia Ceci & Katia Colaneri & Alessandra Cretarola, 2015. "The F\"ollmer-Schweizer decomposition under incomplete information," Papers 1511.05465, arXiv.org, revised Mar 2016.
    • Handle: RePEc:arx:papers:1511.05465
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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.
    2. Ceci, Claudia & Colaneri, Katia & Cretarola, Alessandra, 2014. "A benchmark approach to risk-minimization under partial information," Insurance: Mathematics and Economics, Elsevier, vol. 55(C), pages 129-146.
    3. Rüdiger Frey & Wolfgang Runggaldier, 2010. "Pricing credit derivatives under incomplete information: a nonlinear-filtering approach," Finance and Stochastics, Springer, vol. 14(4), pages 495-526, December.
    4. Ceci, Claudia & Cretarola, Alessandra & Russo, Francesco, 2014. "BSDEs under partial information and financial applications," Stochastic Processes and their Applications, Elsevier, vol. 124(8), pages 2628-2653.
    5. Claudia Ceci & Anna Gerardi, 2006. "A Model For High Frequency Data Under Partial Information: A Filtering Approach," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 9(04), pages 555-576.
    6. Michael Mania & Marina Santacroce, 2010. "Exponential utility maximization under partial information," Finance and Stochastics, Springer, vol. 14(3), pages 419-448, September.
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    Cited by:

    1. Martin Schweizer & Danijel Zivoi & Mario Šikić, 2018. "Dynamic Mean–Variance Optimization Problems With Deterministic Information," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 21(02), pages 1-38, March.
    2. Tomoyuki Ichiba & Seyyed Mostafa Mousavi, 2017. "Option Pricing with Delayed Information," Papers 1707.01600, arXiv.org.

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