Minimax theorems for American options without time-consistency (Q1711726)

Minimax results play an important role in the characterisation of arbitrage-free prices of American contingent claims in incomplete market. In the present paper sufficient conditions that guarantee the validity of the well-known minimax theorem for the lower Snell envelope are given. These conditions do not rely on the notions of stability under pasting or time-consistency and reveal some connection between the minimax result and path properties of the corresponding process of densities. The obtained theoretical results are applied to diffusion exponential martingales. \par In the Introduction of the paper the theoretical background of the minimax problem is developed. Here, \((\Omega, \mathcal{F}, (\mathcal{F}_t)_{0 \leq t \leq T}, \mathbf{ P})\) is a filtered probability space, where \((\mathcal{F}_t)_{0 \leq t \leq T}\) is a right-continuous filtration. Let \(\mathcal{Q}\) denote a non-empty set of probability measures on \(\mathcal{F},\) all absolutely continuous with respect to \(\mathbf{ P}.\) Also, another right-continuous \((\mathcal{F}_t)-\)adapted stochastic process \(Y = (Y_t)_{0 \leq t \leq T}\) with bounded path is considered, and let \(\mathcal{T}\) stand for the set of all finite shopping time \(\tau \leq T\) with respect to \((\mathcal{F}_t)_{0 \leq t \leq T}.\) The main purpose of the paper is to find sufficient conditions for the validity of the minimax relation \[ \sup_{\tau \in \mathcal{T}} \inf_{Q \in \mathcal{Q}} E_{Q}(Y_\tau) = \inf_{Q \in \mathcal{Q}} \sup_{\tau \in \mathcal{T}} E_{Q}(Y_\tau). \eqno{(1)} \] The notion of the so-called lower Snell envelope and stable under pasting with respect to \((\Omega, \mathcal{F}, (\mathcal{F}_t)_{0 \leq t \leq T}, \mathbf{ P})\) is presented. The main results are presented in Section 2. They are related with the set \(\mathcal{Q}\) whose associated vector measures have relatively compact range. Another criterion in terms of path properties of the corresponding process of densities \((d Q / d \mathbf{ P})_{Q \in \mathcal{Q}}\) is given. In Theorem 2.1 a sufficient condition for solution of minimax problem is presented. In Theorem 2.4 a simple sufficient criterion that guarantees the validity of the minimax relation (1) is given. In Section 3 of the paper a criterion for the case of process of densities corresponding to nearly sub-Gaussian families of local martingales is presented. This result is applied to practically interesting cases of diffusion type families of martingales. In Section 4 related results from literature are discussed. In Section 5 a general minimax result for lower Snell envelopes is obtained. In Theorem 5.1 under given assumptions an another sufficient condition for validity of the minimax relation (1) is presented. Section 6 contains the proofs of the main results of the paper.