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A Benchmark Approach to Filtering in Finance |
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| Authors: | |
| Institution: | (1) Department of Mathematical Sciences, School of Finance and Economics, University of Technology Sydney, Broadway, NSW 2007, Australia;(2) Dipartimento di Matematica Pura ed Applicata, Universit’ degli Studi di Padova, Via Belzoni, 7 I - 35131 Padova, Italy |
| Abstract: | The paper proposes the use of the growth optimal portfolio for pricing and hedging in incomplete markets when there are unobserved factors that have to be filtered. The proposed filtering framework is applicable also in cases when there does not exist an equivalent risk neutral martingale measure. The reduction of the variance of derivative prices for increasing degrees of available information is measured. 1991 Mathematics Subject Classification: primary 90A09; secondary 60G99; 62P20 JEL Classification: G10, G13 |
| Keywords: | financial modeling stochastic filtering benchmark approach growth optimal portfolio fair pricing under partial information |
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