On the Structure of General Mean-Variance Hedging Strategies

Černý, Aleš; Kallsen, Jan

doi:10.2139/ssrn.882762

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On the Structure of General Mean-Variance Hedging Strategies

The Annals of Probability, 2007, 35(4), 1479-1531

51 Pages Posted: 3 May 2005 Last revised: 22 Jun 2020

See all articles by Aleš Černý

Aleš Černý

Bayes Business School, City, University of London

Jan Kallsen

Munich University of Technology

Date Written: April 1, 2005

Abstract

We provide a new characterisation of mean-variance hedging strategies in a general semimartingale market. The key point is the introduction of a new probability measure P* which turns the dynamic asset allocation problem into a myopic one. The minimal martingale measure relative to P* coincides with the variance-optimal martingale measure relative to the original probability measure P.

Keywords: mean-variance hedging, opportunity process, opportunity-neutral measure, incomplete market, Sharpe ratio, semimartingales

JEL Classification: G11, G12, G13

Suggested Citation: Suggested Citation

Černý, Aleš and Kallsen, Jan, On the Structure of General Mean-Variance Hedging Strategies (April 1, 2005). The Annals of Probability, 2007, 35(4), 1479-1531, Available at SSRN: https://ssrn.com/abstract=882762 or http://dx.doi.org/10.2139/ssrn.882762