The numéraire portfolio in semimartingale financial models

DOI10.1007/S00780-007-0047-3MaRDI QIDQ2463718zbMATH OpenOpenAlexFDO

Authors Constantinos Kardaras, Ioannis Karatzas

Publication date 16 December 2007

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

Full work available at URL https://arxiv.org/abs/0803.1877

zbMATH Keywords

free lunchlog-utilitynuméraire portfoliopredictable characteristicssemimartingalesupermartingale deflator

Mathematics Subject Classification ID

Stochastic integrals (60H05) Applications of stochastic analysis (to PDEs, etc.) (60H30) Portfolio theory (91G10)

Abstract: We study the existence of the numeraire portfolio under predictable convex constraints in a general semimartingale model of a financial market. The numeraire portfolio generates a wealth process, with respect to which the relative wealth processes of all other portfolios are supermartingales. Necessary and sufficient conditions for the existence of the numeraire portfolio are obtained in terms of the triplet of predictable characteristics of the asset price process. This characterization is then used to obtain further necessary and sufficient conditions, in terms of a no-free-lunch-type notion. In particular, the full strength of the "No Free Lunch with Vanishing Risk" (NFLVR) is not needed, only the weaker "No Unbounded Profit with Bounded Risk" (NUPBR) condition that involves the boundedness in probability of the terminal values of wealth processes. We show that this notion is the minimal a-priori assumption required in order to proceed with utility optimization. The fact that it is expressed entirely in terms of predictable characteristics makes it easy to check, something that the stronger NFLVR condition lacks.

Review text

The authors consider a general semimartingale model without further mathematical assumptions. On the economic side, it is assumed that assets have their prices determined exogenously and can be traded without ``frictions: transaction costs are non-existent or negligible. The main concern is a problem of dynamic stochastic optimization: to find a trading strategy whose wealth appears ``better when compared to the wealth generated by any other strategy, in the sense that the ratio of the two processes is a supermartingale. If such a strategy exists, it is essentially unique and is called numéraire portfolio. Necessary and sufficient conditions for the numéraire portfolio to exist are derived, in terms of the triplet of predictable characteristics of the stock-price returns. A bare-hands approach is used, the assumption of finite expected log-utility is dropped entirely; no normative assumptions is imposed. It turns out that the numéraire portfolio can exist even when the classical No Arbitrage condition fails.

Recommendations

• The numeraire portfolio for unbounded semimartingale
• The numeraire portfolio in financial markets modeled by a multi-dimensional jump diffusion process
• scientific article; zbMATH DE number 1222788
• Log-optimal portfolio without NFLVR: existence, complete characterization, and duality
• How non-arbitrage, viability and numéraire portfolio are related

Cites work

• \sigma-Localization and \sigma-Martingales
• A BENCHMARK APPROACH TO FINANCE
• A complete explicit solution to the log-optimal portfolio problem.
• A general version of the fundamental theorem of asset pricing
• A minimality property of the minimal martingale measure
• A necessary and sufficient condition for absence of arbitrage with tame portfolios
• Arbitrage possibilities in Bessel processes and their relations to local martingales
• Asymptotic optimality and asymptotic equipartiton properties of log- optimum investment
• Calcul stochastique et problèmes de martingales
• Diversity and relative arbitrage in equity markets
• Equilibrium Models With Singular Asset Prices
• Hedging of contingent claims and maximum price
• scientific article; zbMATH DE number 1210395 (Why is no real title available?)
• scientific article; zbMATH DE number 1304733 (Why is no real title available?)
• scientific article; zbMATH DE number 1351867 (Why is no real title available?)
• scientific article; zbMATH DE number 1095739 (Why is no real title available?)
• scientific article; zbMATH DE number 2149882 (Why is no real title available?)
• scientific article; zbMATH DE number 1834045 (Why is no real title available?)
• scientific article; zbMATH DE number 927094 (Why is no real title available?)
• Martingale and Duality Methods for Utility Maximization in an Incomplete Market
• Martingale densities for general asset prices
• Minimax and minimal distance martingale measures and their relationship to portfolio optimization
• Necessary and sufficient conditions in the problem of optimal investment in incomplete markets
• No Arbitrage and the Growth Optimal Portfolio
• On the pricing of contingent claims under constraints
• Optional decompositions under constraints
• Relative arbitrage in volatility-stabilized markets
• Stochastic Integration with Jumps
• The asymptotic elasticity of utility functions and optimal investment in incomplete markets
• The existence of absolutely continuous local martingale measures
• The fundamental theorem of asset pricing for unbounded stochastic processes
• The numeraire portfolio for unbounded semimartingale

Cited in

(only showing first 100 items - show all)

• The numeraire portfolio in financial markets modeled by a multi-dimensional jump diffusion process
• On the implied market price of risk under the stochastic numéraire
• Arbitrage and utility maximization in market models with an insider
• Shadow prices, fractional Brownian motion, and portfolio optimisation under transaction costs
• An expansion in the model space in the context of utility maximization
• Some no-arbitrage rules under short-sales constraints, and applications to converging asset prices
• On optimal investment with processes of long or negative memory
• Volatility and arbitrage
• Deterministic criteria for the absence of arbitrage in~one-dimensional diffusion models
• Strict local martingale deflators and valuing American call-type options
• Power utility maximization in exponential Lévy models: Convergence of discrete-time to continuous-time maximizers
• Hedging for the long run
• A limit order book model for latency arbitrage
• On utility maximization under convex portfolio constraints
• On the existence of an equivalent supermartingale density for a fork-convex family of stochastic processes
• Numéraire-invariant preferences in financial modeling
• Arbitrage concepts under trading restrictions in discrete-time financial markets
• Polynomial processes in stochastic portfolio theory
• Relative growth optimal strategies in an asset market game
• Duality for optimal consumption under no unbounded profit with bounded risk
• Martingale Schrödinger bridges and optimal semistatic portfolios
• Characterisation of \(L^0\)-boundedness for a general set of processes with no strictly positive element
• Beating the market? A mathematical puzzle for market efficiency
• Log-optimal and numéraire portfolios for market models stopped at a random time
• A continuous-time asset market game with short-lived assets
• Explicit description of all deflators for market models under random horizon with applications to NFLVR
• Making no-arbitrage discounting-invariant: a new FTAP version beyond NFLVR and NUPBR
• Simple explicit formula for near-optimal stochastic lifestyling
• Asymptotic analysis of the expected utility maximization problem with respect to perturbations of the numéraire
• No arbitrage in continuous financial markets
• Optimal investment and consumption with labor income in incomplete markets
• Filtration shrinkage, the structure of deflators, and failure of market completeness
• Statistical properties of estimators for the log-optimal portfolio
• Supermartingale deflators in the absence of a numéraire
• Pricing without no-arbitrage condition in discrete time
• The continuous behavior of the numéraire portfolio under small changes in information structure, probabilistic views and investment constraints
• In which financial markets do mutual fund theorems hold true?
• No-arbitrage under additional information for thin semimartingale models
• Arbitrage-free pricing of derivatives in nonlinear market models
• The value of informational arbitrage
• Consumption-investment problem with pathwise ambiguity under logarithmic utility
• Discrete-time mean-CVaR portfolio selection and time-consistency induced term structure of the CVaR
• Fragility of arbitrage and bubbles in local martingale diffusion models
• Market viability and martingale measures under partial information
• On the stochastic behaviour of optional processes up to random times
• Numeraire portfolios and utility-based price systems under proportional transaction costs
• Hedging, arbitrage and optimality with superlinear frictions
• Logarithmic utility maximization in an exponential Lévy model
• The space of outcomes of semi-static trading strategies need not be closed
• No-arbitrage up to random horizon for quasi-left-continuous models
• Pathwise superreplication via Vovk's outer measure
• The Bellman equation for power utility maximization with semimartingales
• The fundamental theorem of asset pricing, the hedging problem and maximal claims in financial markets with short sales prohibitions
• Intensity-based premium evaluation for unemployment insurance products
• Local risk-minimization under the benchmark approach
• Stochastic exponentials and logarithms on stochastic intervals. A survey
• No free lunch for markets with multiple numéraires
• Generic existence and robust nonexistence of numéraires in finite-dimensional securities markets.
• Arbitrage of the first kind and filtration enlargements in semimartingale financial models
• On an Optional Semimartingale Decomposition and the Existence of a Deflator in an Enlarged Filtration
• Processes that can be embedded in a geometric Brownian motion
• Diffusion-based models for financial markets without martingale measures
• Multiplicative approximation of wealth processes involving no-short-sales strategies via simple trading
• A mathematical theory of financial bubbles
• A concise characterization of optimal consumption with logarithmic preferences
• Drift operator in a viable expansion of information flow
• Pricing of unemployment insurance products with doubly stochastic Markov chains
• THE NUMÉRAIRE PROPERTY AND LONG-TERM GROWTH OPTIMALITY FOR DRAWDOWN-CONSTRAINED INVESTMENTS
• Optimal investment with intermediate consumption and random endowment
• Admissible strategies in semimartingale portfolio selection
• Duality theory for portfolio optimisation under transaction costs
• Convergence in the Semimartingale Topology and Constrained Portfolios
• A new perspective on the fundamental theorem of asset pricing for large financial markets
• Informational efficiency under short sale constraints
• No arbitrage of the first kind and local martingale numéraires
• On the closure in the emery topology of semimartingale wealth-process sets
• Portfolio optimisation under non-linear drawdown constraints in a semimartingale financial model
• scientific article; zbMATH DE number 1222788 (Why is no real title available?)
• Outperforming the market portfolio with a given probability
• scientific article; zbMATH DE number 1789940 (Why is no real title available?)
• Model-free portfolio theory and its functional master formula
• Optimal consumption of multiple goods in incomplete markets
• A time before which insiders would not undertake risk
• Fundamental theorems of asset pricing for piecewise semimartingales of stochastic dimension
• On arbitrages arising with honest times
• On the existence of shadow prices for optimal investment with random endowment
• A CAPM with trading constraints and price bubbles
• Martingale representation processes and applications in the market viability under information flow expansion
• A note on the condition of no unbounded profit with bounded risk
• Optimal investment with intermediate consumption under no unbounded profit with bounded risk
• Abstract, classic, and explicit turnpikes
• Pricing and hedging of long dated variance swaps under a \(3/2\) volatility model
• Necessary and sufficient conditions in the problem of optimal investment with intermediate consumption
• Convex Duality in Mean-Variance Hedging Under Convex Trading Constraints
• Generalized supermartingale deflators under limited information
• The meaning of market efficiency
• The small and large time implied volatilities in the minimal market model
• Hedging under arbitrage
• Power utility maximization in constrained exponential Lévy models
• A stochastic partial differential equation model for limit order book dynamics

This page was built for publication: The numéraire portfolio in semimartingale financial models

Report a bug (only for logged in users!)Click here to report a bug for this page (MaRDI item Q2463718)