Risk-minimization and hedging claims on a jump-diffusion market model, Feynman-Kac Theorem and PIDE

Abstract

At first, we solve a problem of finding a risk-minimizing hedging strategy on a general market with ratings. Next, we find a solution to this problem on Markovian market with ratings on which prices are influenced by additional factors and rating, and behavior of this system is described by SDE driven by Wiener process and compensated Poisson random measure and claims depend on rating. To find a tool to calculate hedging strategy we prove a Feynman-Kac type theorem. This result is of independent interest and has many applications, since it enables to calculate some conditional expectations using related PIDE's. We illustrate our theory on two examples of market. The first is a general exponential Lévy model with stochastic volatility, and the second is a generalization of exponential Lévy model with regime-switching.