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JOURNALS // Ural Mathematical Journal // Archive

Ural Math. J., 2020 Volume 6, Issue 2, Pages 76–86 (Mi umj128)

Some notes about the martingale representation theorem and their applications

Reza Habibi

Iran Banking Institute, Central Bank of Iran, Pasdaran Ave., 8-th Negarestan, Tehran, Iran

Abstract: An important theorem in stochastic finance field is the martingale representation theorem. It is useful in the stage of making hedging strategies (such as cross hedging and replicating hedge) in the presence of different assets with different stochastic dynamics models. In the current paper, some new theoretical results about this theorem including derivation of serial correlation function of a martingale process and its conditional expectations approximation are proposed. Applications in optimal hedge ratio and financial derivative pricing are presented and sensitivity analyses are studied. Throughout theoretical results, simulation-based results are also proposed. Two real data sets are analyzed and concluding remarks are given. Finally, a conclusion section is given.

Keywords: conditional expectation, derivative pricing, martingale representation theorem, optimal hedge ratio, sensitivity analysis, serial correlation, simulation, stochastic dynamic.

Language: English

DOI: 10.15826/umj.2020.2.008



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