Optimal Robust Mean-Variance Hedging in Incomplete Financial Markets

TL;DR

This paper develops a robust mean-variance hedging strategy for incomplete financial markets with model misspecification and applies it to stochastic volatility models with unknown parameters.

Contribution

It introduces a new optimal V-robust hedging approach for multidimensional parameters in incomplete markets with arbitrary information structures.

Findings

The robust hedging strategy effectively manages model misspecification.

Application to stochastic volatility models demonstrates practical utility.

The approach handles multidimensional unknown parameters in drift and diffusion.

Abstract

Optimal B-robust estimate is constructed for multidimensional parameter in drift coefficient of diffusion type process with small noise. Optimal mean-variance robust (optimal V -robust) trading strategy is find to hedge in mean-variance sense the contingent claim in incomplete financial market with arbitrary information structure and misspecified volatility of asset price, which is modelled by multidimensional continuous semimartingale. Obtained results are applied to stochastic volatility model, where the model of latent volatility process contains unknown multidimensional parameter in drift coefficient and small parameter in diffusion term.