The pricing of contingent claims and optimal positions in asymptotically complete markets

DOI10.1214/16-AAP1246zbMATH Open1414.91360arXiv1509.06210MaRDI QIDQ2403142FDOQ2403142

Authors: Michail Anthropelos, Scott Robertson, Konstantinos Spiliopoulos 

Publication date: 15 September 2017

Published in: The Annals of Applied Probability (Search for Journal in Brave)

Abstract: We study utility indifference prices and optimal purchasing quantities for a contingent claim, in an incomplete semi-martingale market, in the presence of vanishing hedging errors and/or risk aversion. Assuming that the average indifference price converges to a well defined limit, we prove that optimally taken positions become large in absolute value at a specific rate. We draw motivation from and make connections to Large Deviations theory, and in particular, the celebrated G"{a}rtner-Ellis theorem. We analyze a series of well studied examples where this limiting behavior occurs, such as fixed markets with vanishing risk aversion, the basis risk model with high correlation, models of large markets with vanishing trading restrictions and the Black-Scholes-Merton model with either vanishing default probabilities or vanishing transaction costs. Lastly, we show that the large claim regime could naturally arise in partial equilibrium models.

Full work available at URL: https://arxiv.org/abs/1509.06210

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zbMATH Keywords

incomplete marketsutility functionsindifference pricinglarge position size

Mathematics Subject Classification ID

Derivative securities (option pricing, hedging, etc.) (91G20) Large deviations (60F10) Generalizations of martingales (60G48) Stochastic ordinary differential equations (aspects of stochastic analysis) (60H10)

Cited In (18)

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• A new market model in the large volatility case
• On the density of properly maximal claims in financial markets with transaction costs
• Sharpe-ratio pricing and hedging of contingent claims in incomplete markets by convex programming
• Dynamic Programming and Pricing of Contingent Claims in an Incomplete Market
• Quadratic expansions in optimal investment with respect to perturbations of the semimartingale model

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