A general problem of an optimal equivalent change of measure and contingent claim pricing in an incomplete market. (Q1879481): Difference between revisions

The paper studies the (semi-, super-)martingale properties of the value process for the optimization of expected value over a family of equivalent martingale measures. Sufficient conditions on the densities of the involved measures in terms of square integrability, uniform dominance of predictable square characteristics, and closeness with respect to strong bifurcations, are listed, allowing a martingale characterization of the value process when the optimum is attainable. These conditions also make possible the formulation of a differential semimartingale equation for the value process in terms of the Hamiltonian of the optimization problem. The result is applied to the problem of the maximum contingent claim price in an incomplete securities market, given that the set of local martingale measures is non-empty.