Convex order for path-dependent derivatives: a dynamic programming approach
From MaRDI portal
diffusionsdynamic programmingEuler schemesfunctional convex orderfunctional limit theoremsmartingalesmathematical financestochastic differential equations
Martingales with continuous parameter (60G44) Processes with independent increments; Lévy processes (60G51) Stochastic ordinary differential equations (aspects of stochastic analysis) (60H10) Diffusion processes (60J60) Brownian motion (60J65) Numerical solutions to stochastic differential and integral equations (65C30) Algorithms for approximation of functions (65D15) Dynamic programming (90C39) Derivative securities (option pricing, hedging, etc.) (91G20) Numerical methods (including Monte Carlo methods) (91G60)
Abstract: We investigate the (functional) convex order of for various continuous martingale processes, either with respect to their diffusions coefficients for L'evy-driven SDEs or their integrands for stochastic integrals. Main results are bordered by counterexamples. Various upper and lower bounds can be derived for path wise European option prices in local volatility models. In view of numerical applications, we adopt a systematic (and symmetric) methodology: (a) propagate the convexity in a {em simulatable} dominating/dominated discrete time model through a backward induction (or linear dynamical principle); (b) Apply functional weak convergence results to numerical schemes/time discretizations of the continuous time martingale satisfying (a) in order to transfer the convex order properties. Various bounds are derived for European options written on convex pathwise dependent payoffs. We retrieve and extend former results obtains by several authors since the seminal 1985 paper by Hajek . In a second part, we extend this approach to Optimal Stopping problems using a that the Snell envelope satisfies (a') a Backward Dynamical Programming Principle to propagate convexity in discrete time; (b') satisfies abstract convergence results under non-degeneracy assumption on filtrations. Applications to the comparison of American option prices on convex pathwise payoff processes are given obtained by a purely probabilistic arguments.
Recommendations
Cites work
- Comparing Brownian stochastic integrals for the convex order
- Comparison of option prices in semimartingale models
- Comparison of semimartingales and Lévy processes
- Comparison results for path-dependent options
- Convergence en loi des suites d'integrales stochastiques sur l'espace \({\mathbb{D}}^ 1\) de Skorokhod. (Convergence in law of sequences of stochastic integrals on the Skorokhod space \({\mathbb{D}}^ 1)\)
- Convexity and well-posed problems
- scientific article; zbMATH DE number 4034749 (Why is no real title available?)
- scientific article; zbMATH DE number 3778509 (Why is no real title available?)
- scientific article; zbMATH DE number 51724 (Why is no real title available?)
- scientific article; zbMATH DE number 54145 (Why is no real title available?)
- scientific article; zbMATH DE number 1245556 (Why is no real title available?)
- scientific article; zbMATH DE number 1354815 (Why is no real title available?)
- scientific article; zbMATH DE number 699438 (Why is no real title available?)
- scientific article; zbMATH DE number 729191 (Why is no real title available?)
- scientific article; zbMATH DE number 1834045 (Why is no real title available?)
- Markov-Komposition und eine Anwendung auf Martingale. (Markov compositions and an application to martingales)
- Mean stochastic comparison of diffusions
- On the pricing of American options
- Optimal stopping with irregular reward functions
- Peacocks and associated martingales, with explicit constructions
- Robust hedging of the lookback option
- Robustness of the Black and Scholes Formula
- The Euler scheme for Lévy driven stochastic differential equations: limit theorems.
- Weak limit theorems for stochastic integrals and stochastic differential equations
Cited in
(11)- Convex order, quantization and monotone approximations of ARCH models
- Monotone convex order for the McKean-Vlasov processes
- Comparison results for path-dependent options
- scientific article; zbMATH DE number 5693693 (Why is no real title available?)
- Note—Pathwise Convexity and its Relation to Convergence of Time-Average Derivatives
- On a Class of Path-Dependent Singular Stochastic Control Problems
- Robustness of Delta Hedging in a Jump-Diffusion Model
- Functional convex order for the scaled McKean-Vlasov processes
- Convex ordering for stochastic Volterra equations and their Euler schemes
- Convex ordering for stochastic control: the (path dependent) swing contracts case
- Convex comparison of Gaussian mixtures
This page was built for publication: Convex order for path-dependent derivatives: a dynamic programming approach
Report a bug (only for logged in users!)Click here to report a bug for this page (MaRDI item Q5270095)
