Robust pricing and hedging under trading restrictions and the emergence of local martingale models

DOI10.1007/S00780-016-0293-3MaRDI QIDQ309166zbMATH OpenOpenAlexDBLPWikidataFDO

Authors Zhaoxu Hou, Jan Obłój, Alexander Matthew Gordon Cox

Publication date 7 September 2016

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

Copyright license Creative Commons Attribution 4.0 International

Full work available at URL https://arxiv.org/abs/1406.0551

zbMATH Keywords

financial bubblelocal martingale modelsmartingale optimal transportpricing-hedging dualityrobust pricing and hedgingshort selling constrainttrading restrictions

Mathematics Subject Classification ID

Derivative securities (option pricing, hedging, etc.) (91G20) Martingales with continuous parameter (60G44) Actuarial science and mathematical finance (91G99)

Abstract: We consider the pricing of derivatives in a setting with trading restrictions, but without any probabilistic assumptions on the underlying model, in discrete and continuous time. In particular, we assume that European put or call options are traded at certain maturities, and the forward price implied by these option prices may be strictly decreasing in time. In discrete time, when call options are traded, the short-selling restrictions ensure no arbitrage, and we show that classical duality holds between the smallest super-replication price and the supremum over expectations of the payoff over all supermartingale measures. More surprisingly in the case where the only vanilla options are put options, we show that there is a duality gap. Embedding the discrete time model into a continuous time setup, we make a connection with (strict) local-martingale models, and derive framework and results often seen in the literature on financial bubbles. This connection suggests a certain natural interpretation of many existing results in the literature on financial bubbles.

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Cited in

(11)

• Financial asset price bubbles under model uncertainty
• Fine properties of the optimal Skorokhod embedding problem
• Canonical supermartingale couplings
• Quantile hedging in a semi-static market with model uncertainty
• Trajectorial market models: arbitrage and pricing intervals
• A unified framework for robust modelling of financial markets in discrete time
• Strict local martingales and optimal investment in a Black-Scholes model with a bubble
• Robust pricing-hedging dualities in continuous time
• Robust hedging of options on a leveraged exchange traded fund
• Model-independent pricing with insider information: a Skorokhod embedding approach
• A risk-neutral equilibrium leading to uncertain volatility pricing

Describes a project that uses

Uses Software

• Mathematica

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