On Utility-Based Superreplication Prices of Contingent Claims with Unbounded Payoffs

DOI10.1239/JAP/1197908811MaRDI QIDQ5448739zbMATH OpenOpenAlexFDO

Authors Frank Oertel, Mark P. Owen

Publication date 7 March 2008

Published in Journal of Applied Probability (Search for Journal in Brave)

Full work available at URL https://arxiv.org/abs/math/0609403, https://projecteuclid.org/euclid.jap/1197908811

zbMATH Keywords

contingent claimduality theoryincomplete marketsuperreplicationweak topology

Mathematics Subject Classification ID

Applications of functional analysis in optimization, convex analysis, mathematical programming, economics (46N10) Martingales with continuous parameter (60G44) Derivative securities (option pricing, hedging, etc.) (91G20)

Abstract: Consider a financial market in which an agent trades with utility-induced restrictions on wealth. For a utility function which satisfies the condition of reasonable asymptotic elasticity at $-infty$ we prove that the utility-based super-replication price of an unbounded (but sufficiently integrable) contingent claim is equal to the supremum of its discounted expectations under pricing measures with finite {it loss-entropy}. For an agent whose utility function is unbounded from above, the set of pricing measures with finite loss-entropy can be slightly larger than the set of pricing measures with finite entropy. Indeed, the former set is the closure of the latter under a suitable weak topology. Central to our proof is the representation of a cone $C_U$ of utility-based super-replicable contingent claims as the polar cone to the set of finite loss-entropy pricing measures. The cone $C_U$ is defined as the closure, under a relevant weak topology, of the cone of all (sufficiently integrable) contingent claims that can be dominated by a zero-financed terminal wealth. We investigate also the natural dual of this result and show that the polar cone to $C_U$ is generated by those separating measures with finite loss-entropy. The full two-sided polarity we achieve between measures and contingent claims yields an economic justification for the use of the cone $C_U$, and an open question.

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Cited in

(8)

• Geometry of polar wedges in Riesz spaces and super-replication prices in incomplete financial markets
• Constrained nonsmooth utility maximization without quadratic inf convolution
• On the super replication price of unbounded claims
• Super-replication and utility maximization in large financial markets
• Pricing via utility maximization and entropy.
• A dual representation of gain-loss hedging for European claims in discrete time
• Pricing with non-smooth utility function
• Convergence of utility indifference prices to the superreplication price: the whole real line case

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