Market completion with derivative securities

DOI10.1007/S00780-016-0317-ZMaRDI QIDQ503398zbMATH OpenOpenAlexDBLPWikidataFDO

Authors Daniel Schwarz

Publication date 12 January 2017

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/1506.00188

zbMATH Keywords

martingalesparabolic equationsanalytic functionsintegral representationJacobian determinantmarket completenessderivative securities

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) Stochastic integrals (60H05)

Abstract: Let $S^F$ be a $mathbbP$-martingale representing the price of a primitive asset in an incomplete market framework. We present easily verifiable conditions on model coefficients which guarantee the completeness of the market in which in addition to the primitive asset one may also trade a derivative contract $S^B$. Both $S^F$ and $S^B$ are defined in terms of the solution $X$ to a $2$-dimensional stochastic differential equation: $S_t^F=f(X_t)$ and $S_t^B:=mathbbE[g(X_1)|mathcal{F}_t]$. From a purely mathematical point of view we prove that every local martingale under $mathbbP$ can be represented as a stochastic integral with respect to the $mathbbP$-martingale $S:=(S^F{S}^B)$. Notably, in contrast to recent results on the endogenous completeness of equilibria markets, our conditions allow the Jacobian matrix of $(f,g)$ to be singular everywhere on $mathbf{R}^2$. Hence they cover, as a special case, the prominent example of a stochastic volatility model being completed with a European call (or put) option.

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Cited in

(13)

• Radner equilibrium and systems of quadratic BSDEs with discontinuous generators
• Completeness of security markets and backward stochastic differential equations with unbounded coefficients
• Equilibrium Pricing Under Relative Performance Concerns
• Density of the set of probability measures with the martingale representation property
• Non-implementability of Arrow-Debreu equilibria by continuous trading under volatility uncertainty
• Specification and execution of composite trading activities
• Option spanning beyond \(L_p\)-models
• Asset price bubbles, wealth preserving, dominating, and replicating trading strategies
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