BSDEs driven by multidimensional martingales and their applications to markets with funding costs

DOI10.1137/S0040585X97T987880zbMATH Open1352.60086arXiv1410.0449MaRDI QIDQ3178727FDOQ3178727

Authors: Tianyang Nie, Marek Rutkowski 

Publication date: 7 December 2016

Published in: Theory of Probability & Its Applications (Search for Journal in Brave)

Abstract: We establish some well-posedness and comparison results for BSDEs driven by one- and multi-dimensional martingales. On the one hand, our approach is largely motivated by results and methods developed in Carbone et al. (2008) and El Karoui and Huang (1997). On the other hand, our results are also motivated by the recent developments in arbitrage pricing theory under funding costs and collateralization. A new version of the comparison theorem for BSDEs driven by a multi-dimensional martingale is established and applied to the pricing and hedging BSDEs studied in Bielecki and Rutkowski (2014) and Nie and Rutkowski (2014). This allows us to obtain the existence and uniqueness results for unilateral prices and to demonstrate the existence of no-arbitrage bounds for a collateralized contract when both agents have non-negative initial endowments.

Full work available at URL: https://arxiv.org/abs/1410.0449

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zbMATH Keywords

arbitrage pricingcomparison theoremBSDEfunding costs

Mathematics Subject Classification ID

Derivative securities (option pricing, hedging, etc.) (91G20) Stochastic ordinary differential equations (aspects of stochastic analysis) (60H10) Martingales with continuous parameter (60G44) Applications of stochastic analysis (to PDEs, etc.) (60H30) Financial applications of other theories (91G80)

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Cited In (12)

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• Reflected and doubly reflected BSDEs driven by RCLL martingales
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• American options in nonlinear markets
• A change of measure formula for recursive conditional expectations
• A BSDE approach to fair bilateral pricing under endogenous collateralization
• Pricing and hedging vulnerable option with funding costs and collateral
• Existence, uniqueness and strict comparison theorems for BSDEs driven by RCLL martingales
• Generalized BSDEs driven by RCLL martingales with stochastic monotone coefficients

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