Market completion using options

MaRDI QIDQ3534746zbMATH OpenFDO

Authors Mark H. A. Davis, Jan Obłój

Publication date 4 November 2008

Full work available at URL https://arxiv.org/abs/0710.2792

zbMATH Keywords

market completenessmartingale modelreal analytic functionsstochastic volatilitytraded optionsvariance swap

Mathematics Subject Classification ID

Diffusion processes (60J60) Stochastic models in economics (91B70)

Abstract: Mathematical models for financial asset prices which include, for example, stochastic volatility or jumps are incomplete in that derivative securities are generally not replicable by trading in the underlying. In earlier work (2004) the first author provided a geometric condition under which trading in the underlying and a finite number of vanilla options completes the market. We complement this result in several ways. First, we show that the geometric condition is not necessary and a weaker, necessary and sufficient, condition is presented. While this condition is generally not directly verifiable, we show that it simplifies to matrix non-degeneracy in a single point when the pricing functions are real analytic functions. In particular, any stochastic volatility model is then completed with an arbitrary European type option. Further, we show that adding path-dependent options such as a variance swap to the set of primary assets, instead of plain vanilla options, also completes the market.

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Cited in

(20)

• Non-implementability of Arrow-Debreu equilibria by continuous trading under volatility uncertainty
• Option spanning beyond \(L_p\)-models
• Completion of a Lévy market by power-jump assets
• On securitization, market completion and equilibrium risk transfer
• Solution of option pricing equations using orthogonal polynomial expansion.
• Density of the set of probability measures with the martingale representation property
• Model uncertainty, recalibration, and the emergence of delta-vega hedging
• Risk-neutral compatibility with option prices
• Integral representation of martingales motivated by the problem of endogenous completeness in financial economics
• The Heston stochastic volatility model has a boundary trace at zero volatility
• Contingent claims and market completeness in a stochastic volatility model.
• Dynamic complex hedging in additive markets
• Space-time analyticity of weak solutions to linear parabolic systems with variable coefficients
• A Note on Market Completeness with American Put Options
• Short Communication: Dynamics of Symmetric SSVI Smiles and Implied Volatility Bubbles
• Joint modeling and calibration of SPX and VIX by optimal transport
• Market completion with derivative securities
• The completion of real-asset markets by options
• Arbitrage-Free Neural-SDE Market Models
• A secret to create a complete market from an incomplete market

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