Understanding the dual formulation for the hedging of path-dependent options with price impact
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Publication:2170357
DOI10.1214/21-AAP1719zbMATH Open1498.91430arXiv1912.03946OpenAlexW3125271351MaRDI QIDQ2170357FDOQ2170357
Authors: Bruno Bouchard, Xiaolu Tan 
Publication date: 5 September 2022
Published in: The Annals of Applied Probability (Search for Journal in Brave)
Abstract: We consider a general path-dependent version of the hedging problem with price impact of Bouchard et al. (2019), in which a dual formulation for the super-hedging price is obtained by means of PDE arguments, in a Markovian setting and under strong regularity conditions. Using only probabilistic arguments, we prove, in a path-dependent setting and under weak regularity conditions, that any solution to this dual problem actually allows one to construct explicitly a perfect hedging portfolio. From a pure probabilistic point of view, our approach also allows one to exhibit solutions to a specific class of second order forward backward stochastic differential equations, in the sense of Cheridito et al. (2007). Existence of a solution to the dual optimal control problem is also addressed in particular settings. As a by-product of our arguments, we prove a version of It{^o}'s Lemma for path-dependent functionals that are only C^{0,1} in the sense of Dupire.
Full work available at URL: https://arxiv.org/abs/1912.03946
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Derivative securities (option pricing, hedging, etc.) (91G20) Stochastic partial differential equations (aspects of stochastic analysis) (60H15)
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Cited In (4)
- Duality Formulas for Robust Pricing and Hedging in Discrete Time
- Second-order stochastic target problems with generalized market impact
- A \(\mathbb{C}^{0, 1}\)-functional Itô's formula and its applications in mathematical finance
- Hedging with physical or cash settlement under transient multiplicative price impact
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