Mean‐Variance Hedging for Stochastic Volatility Models

Abstract

In this paper we discuss the tractability of stochastic volatility models for pricing and hedging options with the mean‐variance hedging approach. We characterize the variance‐optimal measure as the solution of an equation between Doléans exponentials; explicit examples include both models where volatility solves a diffusion equation and models where it follows a jump process. We further discuss the closedness of the space of strategies.