Bond market completeness and attainable contingent claims (Q2488489): Difference between revisions

The authors deal with the problem of completeness of continuous time markets of zero-coupon bonds with arbitrary positive time to maturity. The contingent claims are supposed to be elements of the space \(D_0=\bigcap_{p \geq 1} L^p\), where the \(L^p\) spaces are defined with respect to an a priori given probability measure \(P\). The zero-coupon price \(p_t\) at a given time \(t\) is, as a function of time, to maturity an element of a certain Sobolev space of continuous functions. The basic random object is the price curve, which is \(\infty\)-dimensional. The first purpose is to establish rigorously that the bond market with a usual derivative market such as \( D_0\) cannot be complete in the case of a countable infinity of Brownian motions. The second purpose is to introduce spaces \(D_s\) of allowed European contingent claims satisfying some special conditions and sufficiently large to contain all commonly used derivatives. Then the author gives conditions on the volatility operator such that the market is \(D_s\)-complete for certain \(s>0\). Such completeness is applied to the optimal portfolio problem. The optimal terminal discounted wealth is found under general conditions and then a hedging portfolio is constructed for certain cases (deterministic volatility, finite number of Bm).