Filtration shrinkage, the structure of deflators, and failure of market completeness

DOI10.1007/S00780-020-00435-2zbMATH Open1456.60099arXiv1912.04652OpenAlexW3083668951MaRDI QIDQ2211342FDOQ2211342

Authors: Constantinos Kardaras, Johannes Ruf 

Publication date: 11 November 2020

Published in: Finance and Stochastics (Search for Journal in Brave)

Abstract: We analyse the structure of local martingale deflators projected on smaller filtrations. In a general continuous-path setting, we show that the local martingale part in the multiplicative Doob-Meyer decomposition of projected local martingale deflators are themselves local martingale deflators in the smaller information market. Via use of a Bayesian filtering approach, we demonstrate the exact mechanism of how updates on the possible class of models under less information result in the strict supermartingale property of projections of such deflators. Finally, we demonstrate that these projections are unable to span all possible local martingale deflators in the smaller information market, by investigating a situation where market completeness is not retained under filtration shrinkage.

Full work available at URL: https://arxiv.org/abs/1912.04652

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zbMATH Keywords

Bayes ruleBrownian motionlocal martingale[https://portal.mardi4nfdi.de/w/index.php?title=+Special%3ASearch&search=L%EF%BF%BD%EF%BF%BDvy+transform&go=Go L��vy transform]market completenesspredictable representation propertydeflator

Mathematics Subject Classification ID

Derivative securities (option pricing, hedging, etc.) (91G20) Stochastic ordinary differential equations (aspects of stochastic analysis) (60H10) Martingales with continuous parameter (60G44)

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Cited In (6)

• Generalized supermartingale deflators under limited information
• Simplified calculus for semimartingales: multiplicative compensators and changes of measure
• Thin times and random times' decomposition
• Filtration shrinkage, strict local martingales and the Föllmer measure
• Optional projection under equivalent local martingale measures
• Uniqueness in Cauchy problems for diffusive real-valued strict local martingales

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