Mean-variance hedging for interest rate models¶with stochastic volatility |
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Authors: | Francesca Biagini |
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Institution: | Dipartimento di Matematica, Università di Bologna?e-mail: biagini@dm.unibo.it, IT
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Abstract: | The mean-variance hedging approach for pricing and hedging claims in incomplete markets was originally introduced for risky
assets. The aim of this paper is to apply this approach to interest rate models in the presence of stochastic volatility,
seen as a consequence of incomplete information. We fix a finite number of bonds such that the volatility matrix is invertible
and provide an explicit formula for the density of the variance-optimal measure which is independent of the chosen times of
maturity.
Finally, we compute the mean-variance hedging strategy for a caplet and compare it with the optimal stategy according to the
local risk minimizing approach.
Received: 14 July 2000 / Accepted: 10 April 2001 |
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Keywords: | Mathematics Subject Classification (2000): 60H30 90A09 |
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