Market completion with derivative securities

DOI10.1007/S00780-016-0317-ZzbMATH Open1377.91162DBLPjournals/fs/Schwarz17arXiv1506.00188OpenAlexW3102802668WikidataQ59615560 ScholiaQ59615560MaRDI QIDQ503398FDOQ503398

Authors: Daniel Schwarz 

Publication date: 12 January 2017

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

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.

Full work available at URL: https://arxiv.org/abs/1506.00188

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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)

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Cited In (13)

• Density of the set of probability measures with the martingale representation property
• Arbitrage-Free Neural-SDE Market Models
• Completeness of security markets and backward stochastic differential equations with unbounded coefficients
• Specification and execution of composite trading activities
• Option spanning beyond \(L_p\)-models
• Completeness of security markets and solvability of linear backward stochastic differential equations
• Title not available (Why is that?)
• Equilibrium Pricing Under Relative Performance Concerns
• Asset price bubbles, wealth preserving, dominating, and replicating trading strategies
• Non-implementability of Arrow-Debreu equilibria by continuous trading under volatility uncertainty
• Market completion using options
• Radner equilibrium and systems of quadratic BSDEs with discontinuous generators
• Existence of an equilibrium with limited participation

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