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More On Minimal Entropy–Hellinger Martingale Measure

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  • Tahir Choulli
  • Christophe Stricker
Abstract
This paper extends our recent paper (Choulli and Stricker 2005) to the case when the discounted stock price process may be unbounded and may have predictable jumps. In this very general context, we provide mild necessary conditions for the existence of the minimal entropy–Hellinger local martingale density and we give an explicit description of this extremal martingale density that can be determined by pointwise solution of equations in depending only on the local characteristics of the discounted price process S. The uniform integrability and other integrability properties are investigated for this extremal density, which lead to the conditions of the existence of the minimal entropy–Hellinger martingale measure. Finally, we illustrate the main results of the paper in the case of a discrete‐time market model, where the relationship of the obtained optimal martingale measure to a dynamic risk measure is discussed.

Suggested Citation

  • Tahir Choulli & Christophe Stricker, 2006. "More On Minimal Entropy–Hellinger Martingale Measure," Mathematical Finance, Wiley Blackwell, vol. 16(1), pages 1-19, January.
    • Handle: RePEc:bla:mathfi:v:16:y:2006:i:1:p:1-19
    DOI: 10.1111/j.1467-9965.2006.00258.x
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    Citations

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    Cited by:

    1. Tsukasa Fujiwara, 2009. "The Minimal Entropy Martingale Measures for Exponential Additive Processes," Asia-Pacific Financial Markets, Springer;Japanese Association of Financial Economics and Engineering, vol. 16(1), pages 65-95, March.
    2. Tahir CHOULLI & Martin SCHWEIZER, 2015. "Locally Phi-Integrable Sigma-Martingale Densities for General Semimartingales," Swiss Finance Institute Research Paper Series 15-15, Swiss Finance Institute.
    3. Tahir Choulli & Sina Yansori, 2018. "Log-optimal portfolio and num\'eraire portfolio for market models stopped at a random time," Papers 1810.12762, arXiv.org, revised Aug 2020.
    4. Choulli, Tahir & Stricker, Christophe, 2009. "Comparing the minimal Hellinger martingale measure of order q to the q-optimal martingale measure," Stochastic Processes and their Applications, Elsevier, vol. 119(4), pages 1368-1385, April.
    5. Tahir Choulli & Ella Elazkany & Mich`ele Vanmaele, 2024. "The second-order Esscher martingale densities for continuous-time market models," Papers 2407.03960, arXiv.org.
    6. Tahir Choulli & Sina Yansori, 2018. "Explicit description of all deflators for market models under random horizon with applications to NFLVR," Papers 1803.10128, arXiv.org, revised Feb 2021.
    7. Thorsten Rheinländer & Jenny Sexton, 2011. "Hedging Derivatives," World Scientific Books, World Scientific Publishing Co. Pte. Ltd., number 8062, August.
    8. Hubalek, Friedrich & Sgarra, Carlo, 2009. "On the Esscher transforms and other equivalent martingale measures for Barndorff-Nielsen and Shephard stochastic volatility models with jumps," Stochastic Processes and their Applications, Elsevier, vol. 119(7), pages 2137-2157, July.
    9. Friedrich Hubalek & Carlo Sgarra, 2008. "On the Esscher transforms and other equivalent martingale measures for Barndorff-Nielsen and Shephard stochastic volatility models with jumps," Papers 0807.1227, arXiv.org.
    10. Ivivi J. Mwaniki, 2017. "On skewed, leptokurtic returns and pentanomial lattice option valuation via minimal entropy martingale measure," Cogent Economics & Finance, Taylor & Francis Journals, vol. 5(1), pages 1358894-135, January.
    11. Alessandro Bondi & Dragana Radojičić & Thorsten Rheinländer, 2020. "Comparing Two Different Option Pricing Methods," Risks, MDPI, vol. 8(4), pages 1-28, October.
    12. Choulli, Tahir & Vandaele, Nele & Vanmaele, Michèle, 2010. "The Föllmer-Schweizer decomposition: Comparison and description," Stochastic Processes and their Applications, Elsevier, vol. 120(6), pages 853-872, June.

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