Dynamic conic finance via backward stochastic difference equations
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Abstract: We present an arbitrage free theoretical framework for modeling bid and ask prices of dividend paying securities in a discrete time setup using theory of dynamic acceptability indices. In the first part of the paper we develop the theory of dynamic subscale invariant performance measures, on a general probability space, and discrete time setup. We prove a representation theorem of such measures in terms of a family of dynamic convex risk measures, and provide a representation of dynamic risk measures in terms of g-expectations, and solutions of BSEs with convex drivers. We study the existence and uniqueness of the solutions, and derive a comparison theorem for corresponding BSEs. In the second part of the paper we discuss a market model for dividend paying securities by introducing the pricing operators that are defined in terms of dynamic acceptability indices, and find various properties of these operators. Using these pricing operators, we define the bid and ask prices for the underlying securities and then for derivatives in this market. We show that the obtained market model is arbitrage free, and we also prove a series of properties of these prices.
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Cited in
(18)- A maximum principle for fully coupled controlled forward-backward stochastic difference systems of mean-field type
- A novel approach to exponential stability in mean square of stochastic difference systems with delays
- Acceptability maximization
- A survey of time consistency of dynamic risk measures and dynamic performance measures in discrete time: LM-measure perspective
- DYNAMIC CONIC FINANCE: PRICING AND HEDGING IN MARKET MODELS WITH TRANSACTION COSTS VIA DYNAMIC COHERENT ACCEPTABILITY INDICES
- From bid-ask credit default swap quotes to risk-neutral default probabilities using distorted expectations
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- Robustness of Delta Hedging in a Jump-Diffusion Model
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- Infinite horizon backward stochastic difference equations and related stochastic recursive control problems
- Well-posedness of mean-field forward-backward stochastic difference equations and applications to optimal control
- Time consistency of dynamic risk measures and dynamic performance measures generated by distortion functions
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