An explicit martingale representation for random variables described as a functional of a Lévy process will be given. The Clark-Ocone theorem shows that integrands appeared in a martingale representation are given by conditional expectations of Malliavin derivatives. Our goal is to extend it to random variables which are not Malliavin differentiable. To this end, we make use of Itô’s formula, instead of Malliavin calculus. As an application to mathematical finance, we shall give an explicit representation of locally risk-minimizing strategy of digital options for exponential Lévy models. Since the payoff of digital options is described by an indicator function, we also discuss the Malliavin differentiability of indicator functions with respect to Lévy processes.
|Publication status||Published - 2019 Jun 16|
- Digital options
- Local risk-minimization
- Lévy processes
- Malliavin calculus
- Martingale representation theorem
ASJC Scopus subject areas