Consistent price systems under model uncertainty

DOI10.1007/S00780-015-0286-7MaRDI QIDQ261917zbMATH OpenOpenAlexFDO

Authors Bruno Bouchard, Marcel Nutz

Publication date 29 March 2016

Published in Finance and Stochastics (Search for Journal in Brave)

Full work available at URL https://arxiv.org/abs/1408.5510

zbMATH Keywords

fundamental theorem of asset pricingmodel uncertaintyrandom setsset-valued stochastic processessolvency conetransaction costs

Mathematics Subject Classification ID

Martingales with discrete parameter (60G42) Actuarial science and mathematical finance (91G99) Optimal stochastic control (93E20)

Abstract: We develop a version of the fundamental theorem of asset pricing for discrete-time markets with proportional transaction costs and model uncertainty. A robust notion of no-arbitrage of the second kind is defined and shown to be equivalent to the existence of a collection of strictly consistent price systems.

Review text

The authors give a version of the fundamental theorem of asset pricing for discrete-time models with transaction costs and uncertainty. The investment opportunities in the model are described by a set-valued stochastic process. For each trading day there is given a solvency cone \(K_t\) -- a random set of positions that can be turned into nonnegative ones by immediate exchange (accounting for transaction costs). The \(K_t\) is a convex cone generated by a finite number of vectors. The set \(K^\ast_t\backslash\{0\}\) is interpreted as the set of possible frictionless prices for assets. For each moment, there is given a nonempty convex set of probability measures \(\mathcal{P}_t\) that represents the model uncertainty. The authors define two properties of the model. The first one, \(\text{NA}_2(\mathcal{P})\), is an augmentation of the no-arbitrage condition. It states that \(\zeta\in K_{t+1}\) implies \(\zeta\in K_t\) (\(\mathcal{P}\)-quasi surely). The second one, PCE (price system is extendable), states that for each measurable random variable \(Y\) taking values in \(\operatorname{int} K^\ast_t\) there exists a probability measure \(Q\) and a stochastic process \((Z_s)_{s=t,\dots,T}\) starting as \(Y\), such that \(Z_s\in K^\ast_s\) and \(Z_s\) is a \(Q\)-martingale. The main result of the article states that \(\text{NA}_2(\mathcal{P})\) and PCE are equivalent.

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Cited in

(20)

• Usefulness of resale price maintenance under different levels of sales-effort cost and system-parameter uncertainties
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• Prospective strict no-arbitrage and the fundamental theorem of asset pricing under transaction costs
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• A conditional version of the second fundamental theorem of asset pricing in discrete time
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