Integral representation of martingales motivated by the problem of endogenous completeness in financial economics

DOI10.1016/J.SPA.2013.06.017MaRDI QIDQ2434474zbMATH OpenOpenAlexFDO

Authors Dmitry Kramkov, Silviu Predoiu

Publication date 6 February 2014

Published in Stochastic Processes and their Applications (Search for Journal in Brave)

Full work available at URL https://arxiv.org/abs/1110.3248

zbMATH Keywords

martingalesdiffusionanalytic semigroupsequilibriumparabolic equationsintegral representationreal analytic functionsdynamic completenessKrylov-Itō formula

Mathematics Subject Classification ID

Initial value problems for second-order parabolic equations (35K15) Abstract parabolic equations (35K90) Martingales with continuous parameter (60G44) Dynamic stochastic general equilibrium theory (91B51)

Abstract: Let $mathbbQ$ and $mathbbP$ be equivalent probability measures and let $psi$ be a $J$-dimensional vector of random variables such that $fracdmathbbQdmathbbP$ and $psi$ are defined in terms of a weak solution $X$ to a $d$-dimensional stochastic differential equation. Motivated by the problem of emph{endogenous completeness} in financial economics we present conditions which guarantee that every local martingale under $mathbbQ$ is a stochastic integral with respect to the $J$-dimensional martingale $S_{t}setmathbb{E}^{mathbbQ}[psi|mathcal{F}_t]$. While the drift $b=b(t,x)$ and the volatility $sigma=sigma(t,x)$ coefficients for $X$ need to have only minimal regularity properties with respect to $x$, they are assumed to be analytic functions with respect to $t$. We provide a counter-example showing that this $t$-analyticity assumption for $sigma$ cannot be removed.

Recommendations

• A Martingale Representation Result and an Application to Incomplete Financial Markets
• Numeraires, equivalent martingale measures and completeness in finite dimensional securities markets
• scientific article; zbMATH DE number 2131680
• On integral representations of two-parameter martingales
• REPRESENTING MARTINGALE MEASURES WHEN ASSET PRICES ARE CONTINUOUS AND BOUNDED
• scientific article; zbMATH DE number 4109347
• scientific article; zbMATH DE number 1494228

Cites work

• scientific article; zbMATH DE number 5346226 (Why is no real title available?)
• scientific article; zbMATH DE number 3536702 (Why is no real title available?)
• scientific article; zbMATH DE number 1834045 (Why is no real title available?)
• A model for a large investor trading at market indifference prices. II: Continuous-time case.
• A stochastic calculus model of continuous trading: Complete markets
• Abstract parabolic evolution equations and their applications
• Addendum: On Itô’s Stochastic Integral Equations
• Calcul stochastique et problèmes de martingales
• Endogenous completeness of diffusion driven equilibrium markets
• Equilibrium in Continuous-Time Financial Markets: Endogenously Dynamically Complete Markets
• Existence of an endogenously complete equilibrium driven by a diffusion
• Existence of financial equilibria in continuous time with potentially complete markets
• Market completion using options
• Multidimensional diffusion processes.
• On Itô’s Stochastic Integral Equations
• On the analyticity of solution of evolution equations
• One Dimensional Stochastic Differential Equations with No Strong Solution
• Pricing in an equilibrium based model for a large investor
• SOME NEW RESULTS IN THE THEORY OF CONTROLLED DIFFUSION PROCESSES
• Semigroups of linear operators and applications to partial differential equations

Cited in

(11)

• Existence of an equilibrium with limited participation
• The completeness and incompleteness of financial markets in economies driven by diffusion processes
• Density of the set of probability measures with the martingale representation property
• Existence of financial equilibria in continuous time with potentially complete markets
• Complete and incomplete financial markets in multi-good economies
• Existence of an endogenously complete equilibrium driven by a diffusion
• The role of (quasi) analyticity in establishing completeness of financial markets equilibria
• Duesenberry equilibrium and heterogenous agents
• scientific article; zbMATH DE number 1639860 (Why is no real title available?)
• Market completion with derivative securities
• Dynamic equilibrium with insider information and general uninformed agent utility

This page was built for publication: Integral representation of martingales motivated by the problem of endogenous completeness in financial economics

Report a bug (only for logged in users!)Click here to report a bug for this page (MaRDI item Q2434474)