Local risk-minimization for exponential additive processes

We explore local risk-minimization, a quadratic hedging method for incomplete markets, in exponential additive models. The objectives are to derive explicit representations and to conduct numerical experiments. While local risk-minimization is well studied for Lévy processes, little is known for the additive process case because, unlike Lévy processes, the Lévy measure for an additive process depends on time, which significantly complicates the mathematical framework. This paper provides a set of sufficient conditions for deriving expressions for LRM strategies in exponential additive models, as integrability conditions on the Lévy measure, which allow us to confirm whether these conditions are satisfied for given concrete models. In the final section, we introduce the variance-gamma scaled self-decomposable process, a Sato process that generalizes the variance-gamma process, as a primary example, and perform numerical experiments.

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Publication Details

Journal
Quantitative Finance
Published
2026-10-28
DOI
https://doi.org/10.1080/14697688.2026.2745593
Primary Topic
Stochastic processes and financial applications
Type
article
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article

Local risk-minimization for exponential additive processes

Takuji Arai
1 links
Quantitative Finance
Stochastic processes and financial applications
article

Local risk-minimization for exponential additive processes

Takuji Arai
article en

Abstract

We explore local risk-minimization, a quadratic hedging method for incomplete markets, in exponential additive models. The objectives are to derive explicit representations and to conduct numerical experiments. While local risk-minimization is well studied for Lévy processes, little is known for the additive process case because, unlike Lévy processes, the Lévy measure for an additive process depends on time, which significantly complicates the mathematical framework. This paper provides a set of sufficient conditions for deriving expressions for LRM strategies in exponential additive models, as integrability conditions on the Lévy measure, which allow us to confirm whether these conditions are satisfied for given concrete models. In the final section, we introduce the variance-gamma scaled self-decomposable process, a Sato process that generalizes the variance-gamma process, as a primary example, and perform numerical experiments.

Quantitative Finance
Keio University (JP)
Openalex Percentile: Top 90%
Stochastic processes and financial applications
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