Game-Theoretic Derivation of Discrete Distributions and Discrete Pricing Formulas

DOI10.14490/JJSS.37.87MaRDI QIDQ5439653zbMATH OpenOpenAlexFDO

Authors Taiji Suzuki, Akimichi Takemura

Publication date 11 February 2008

Published in JOURNAL OF THE JAPAN STATISTICAL SOCIETY (Search for Journal in Brave)

Full work available at URL https://arxiv.org/abs/math/0509367

zbMATH Keywords

binomial distributionCox-Ross-Rubinstein formulahypergeometric distributionlower pricePolya's distributionprobability protocolreplicating strategyupper price

Mathematics Subject Classification ID

Exact distribution theory in statistics (62E15) Applications of statistics to actuarial sciences and financial mathematics (62P05) Other game-theoretic models (91A40) Derivative securities (option pricing, hedging, etc.) (91G20)

Abstract: In this expository paper we illustrate the generality of game theoretic probability protocols of Shafer and Vovk (2001) in finite-horizon discrete games. By restricting ourselves to finite-horizon discrete games, we can explicitly describe how discrete distributions with finite support and the discrete pricing formulas, such as the Cox-Ross-Rubinstein formula, are naturally derived from game-theoretic probability protocols. Corresponding to any discrete distribution with finite support, we construct a finite-horizon discrete game, a replicating strategy of Skeptic, and a neutral forecasting strategy of Forecaster, such that the discrete distribution is derived from the game. Construction of a replicating strategy is the same as in the standard arbitrage arguments of pricing European options in the binomial tree models. However the game theoretic framework is advantageous because no a priori probabilistic assumption is needed.

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(2)

• A new formulation of asset trading games in continuous time with essential forcing of variation exponent
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