DYNAMIC CONIC FINANCE: PRICING AND HEDGING IN MARKET MODELS WITH TRANSACTION COSTS VIA DYNAMIC COHERENT ACCEPTABILITY INDICES

DOI10.1142/S0219024913500027zbMATH Open1275.91128arXiv1205.4790OpenAlexW2154365972MaRDI QIDQ4916239FDOQ4916239

Authors: Tomasz R. Bielecki, Igor Cialenco, Ismail Iyigunler, Rodrigo Marín Rodríguez 

Publication date: 22 April 2013

Published in: International Journal of Theoretical and Applied Finance (Search for Journal in Brave)

Abstract: In this paper we present a theoretical framework for determining dynamic ask and bid prices of derivatives using the theory of dynamic coherent acceptability indices in discrete time. We prove a version of the First Fundamental Theorem of Asset Pricing using the dynamic coherent risk measures. We introduce the dynamic ask and bid prices of a derivative contract in markets with transaction costs. Based on these results, we derive a representation theorem for the dynamic bid and ask prices in terms of dynamically consistent sequence of sets of probability measures and risk-neutral measures. To illustrate our results, we compute the ask and bid prices of some path-dependent options using the dynamic Gain-Loss Ratio.

Full work available at URL: https://arxiv.org/abs/1205.4790

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zbMATH Keywords

arbitrage pricingtransaction costsilliquid marketfundamental theorems of asset pricingconic financedynamic coherent risk measuresswap contractsdynamic coherent acceptability indexdividend paying securitiesdynamic bid and askdynamic gain-loss rationo-good-deal bounds

Mathematics Subject Classification ID

Derivative securities (option pricing, hedging, etc.) (91G20) Microeconomic theory (price theory and economic markets) (91B24)

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Cited In (19)

• Short communication: utility-based acceptability indices
• Conditional coherent risk measures and regime-switching conic pricing
• Star-shaped acceptability indexes
• Quantile hedging in a semi-static market with model uncertainty
• Conic portfolio theory
• Markets as a counterparty: an introduction to conic finance
• Acceptability indexes via \(g\)-expectations: an application to liquidity risk
• CONIC CVA AND DVA FOR OPTION PORTFOLIOS
• A unified approach to time consistency of dynamic risk measures and dynamic performance measures in discrete time
• Dynamic bid-ask pricing under Dempster-Shafer uncertainty
• Bid-ask dynamic pricing in financial markets with transaction costs and liquidity risk
• A survey of time consistency of dynamic risk measures and dynamic performance measures in discrete time: LM-measure perspective
• Dynamic quasi concave performance measures
• Acceptability maximization
• Dynamic coherent acceptability indices and their applications to finance
• Dynamic conic finance via backward stochastic difference equations
• From bid-ask credit default swap quotes to risk-neutral default probabilities using distorted expectations
• Deep signature FBSDE algorithm
• Pricing American options by a Fourier transform multinomial tree in a conic market

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