Max-plus decomposition of supermartingales and convex order. Application to American options and portfolio insurance

DOI10.1214/009117907000000222zbMATH Open1152.60038arXiv0804.2561OpenAlexW3122611119MaRDI QIDQ2482283FDOQ2482283

Authors: Asma Meziou, Nicole El Karoui 

Publication date: 16 April 2008

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

Abstract: We are concerned with a new type of supermartingale decomposition in the Max-Plus algebra, which essentially consists in expressing any supermartingale of class $(mathcalD)$ as a conditional expectation of some running supremum process. As an application, we show how the Max-Plus supermartingale decomposition allows, in particular, to solve the American optimal stopping problem without having to compute the option price. Some illustrative examples based on one-dimensional diffusion processes are then provided. Another interesting application concerns the portfolio insurance. Hence, based on the ``Max-Plus martingale, we solve in the paper an optimization problem whose aim is to find the best martingale dominating a given floor process (on every intermediate date), w.r.t. the convex order on terminal values.

Full work available at URL: https://arxiv.org/abs/0804.2561

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zbMATH Keywords

[https://portal.mardi4nfdi.de/w/index.php?title=+Special%3ASearch&search=L%EF%BF%BD%EF%BF%BDvy+processes&go=Go L��vy processes]optimal stoppingAmerican optionsconvex orderportfolio insuranceMax-Plus algebrarunning supremum process[https://portal.mardi4nfdi.de/w/index.php?title=+Special%3ASearch&search=Az%EF%BF%BD%EF%BF%BDma-Yor+martingales&go=Go Az��ma-Yor martingales]martingale optimization with constraintssupermartingale decompositions

Mathematics Subject Classification ID

Processes with independent increments; Lévy processes (60G51) Stopping times; optimal stopping problems; gambling theory (60G40) Martingales with continuous parameter (60G44) General theory of stochastic processes (60G07)

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Cited In (7)

• On a stochastic representation theorem for Meyer-measurable processes
• Expected supremum representation of the value of a singular stochastic control problem
• CONSTRAINED OPTIMIZATION WITH RESPECT TO STOCHASTIC DOMINANCE: APPLICATION TO PORTFOLIO INSURANCE
• On Azéma-Yor processes, their optimal properties and the Bachelier-drawdown equation
• Pension funds with a minimum guarantee: a stochastic control approach
• Long-term optimal portfolios with floor
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