Numeraire-invariant quadratic hedging and mean--variance portfolio allocation

TL;DR

This paper develops a numeraire-invariant quadratic hedging framework in semimartingale markets, providing explicit strategies and a unified approach that does not require a risk-free asset, enhancing understanding of portfolio optimization.

Contribution

It introduces a novel equivalence result allowing direct computation of optimal strategies without numeraire change, applicable even without a risk-free asset.

Findings

Explicit optimal strategies using oblique projections

Unified treatment of markets with or without risk-free assets

Streamlined computation of the efficient frontier

Abstract

The paper investigates quadratic hedging in a semimartingale market that does not necessarily contain a risk-free asset. An equivalence result for hedging with and without numeraire change is established. This permits direct computation of the optimal strategy without choosing a reference asset and/or performing a numeraire change. New explicit expressions for optimal strategies are obtained, featuring the use of oblique projections that provide unified treatment of the case with and without a risk-free asset. The analysis yields a streamlined computation of the efficient frontier for the pure investment problem in terms of three easily interpreted processes. The main result advances our understanding of the efficient frontier formation in the most general case where a risk-free asset may not be present. Several illustrations of the numeraire-invariant approach are given.