Mean-variance Hedging in the Discontinuous Case

Abstract

The results on the mean-variance hedging problem in Gouri\'eroux, Laurent and Pham (1998), Rheinl\"ander and Schweizer (1997) and Arai (2005) are extended to discontinuous semimartingale models. When the num\'eraire method is used, we only assume the Radon-Nikodym derivative of the variance-optimal signed martingale measure (VSMM) is non-zero almost surely (but may be strictly negative). When discussing the relation between the solutions and the Galtchouk-Kunita-Watanabe decompositions under the VSMM, we only assume the VSMM is equivalent to the reference probability.