Comonotonic asset prices in arbitrage-free markets (Q2279857)

In the present paper for an arbitrage-free market with a single underlying asset the authors investigate the conditions under which the consecutive price levels are comonotonic. For an arbitrage-free market with \(n\) assets the authors investigate the consequences of assuming comonotonicity of the vector containing the price levels of each asset at a single future date \(T.\) The results of this paper give an insight in the reachability of the comonotonic upper bounds for Asian options and for basket options. In the Introduction of the paper the notions of arbitrage-free market consisting of a risk-free bank account, the Asian options with strike \(K\) and maturity \(T\) are reminded. In Theorem 4 some equivalent characterizations for a comonotonic random vector of which as least of component has a continuous cdf are presented. The concept of strict comonotonicity is recalled. Also, an arbitrage-free market consisting of \(n\) traded assets and a risk-free bank account in a basket option are considered. In Section 2 the concept of comonotonicity and some its properties are briefly presented. In Theorem 3 four equivalent conditions that a random vector is comonotonic are given. In Section 3 the general financial market in which the results of the paper hold is described. In Section 4 results concerning the comonotonicity of the asset prices of a single asset at different dates are presented. In Theorem 7 by two equivalent conditions the comonotonicity of the vector of stock prices in an arbitrage-free market is characterized. In Example 8 the well-known Cox-Ross-Rubinstein binomial model is considered. The notion of isolated mass point is introduced. In Theorem 10 under additional conditions for the isolated mass point, two equivalent conditions for comonotonicity are presented. Two examples - an arbitrage-free market with comonotonic modification and an arbitrage-free market without comonotonic modification are described. In Section 5 the concept of comonotonicity of the prices of different assets at a single date is considered. The financial market consisting of \(n\) stocks is explained. The Black-Scholes model is described. In Theorem 13 some equivalent conditions that the Black-Scholes model is arbitrage-free are shown. At the end of this section the results of Theorem 13 are applied to some examples. In the conclusion of the paper the relationships between arbitrage-free markets and comonotonicity of the traded asset prices are discussed. In the Appendix of the paper Theorem 10 is proved.