Super-hedging American options with semi-static trading strategies under model uncertainty

DOI10.1142/S0219024917500364zbMATH Open1396.91716arXiv1604.04608MaRDI QIDQ5367496FDOQ5367496

Authors: Erhan Bayraktar, Zhou Zhou 

Publication date: 13 October 2017

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

Abstract: We consider the super-hedging price of an American option in a discrete-time market in which stocks are available for dynamic trading and European options are available for static trading. We show that the super-hedging price $pi$ is given by the supremum over the prices of the American option under randomized models. That is, $pi=su{p}_{(c_i,Q_i{)}_i}su{m}_i{c}_{i}ph{i}^{Q_i}$, where $c_{i}inmathbb{R}_{+}$ and the martingale measure $Q^i$ are chosen such that $su{m}_i{c}_i=1$ and $su{m}_i{c}_i{Q}_i$ prices the European options correctly, and $ph{i}^{Q_i}$ is the price of the American option under the model $Q_i$. Our result generalizes the example given in ArXiv:1604.02274 that the highest model based price can be considered as a randomization over models.

Full work available at URL: https://arxiv.org/abs/1604.04608

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zbMATH Keywords

model uncertaintyAmerican optionssuper-hedgingsemi-static trading strategiesrandomized models

Mathematics Subject Classification ID

Derivative securities (option pricing, hedging, etc.) (91G20) Martingales with discrete parameter (60G42) Stopping times; optimal stopping problems; gambling theory (60G40)

Cites Work

• Arbitrage and duality in nondominated discrete-time models
• On hedging American options under model uncertainty
• Model uncertainty and the pricing of American options
• Arbitrage, hedging and utility maximization using semi-static trading strategies with American options
• A non-compact minimax theorem
• No-arbitrage and hedging with liquid American options

Cited In (13)

• On entropy martingale optimal transport theory
• On robust fundamental theorems of asset pricing in discrete time
• Corrigendum to: ``Second-order reflected backward stochastic differential equations and ``Second-order BSDEs with general reflection and game options under uncertainty
• Robust pricing and hedging around the globe
• Semi-static variance-optimal hedging in stochastic volatility models with Fourier representation
• No-arbitrage and hedging with liquid American options
• Superhedging of American options on an incomplete market with discrete time and finite horizon
• MEASURING MODEL RISK IN FINANCIAL RISK MANAGEMENT AND PRICING
• Pointwise Arbitrage Pricing Theory in Discrete Time
• Pathwise superhedging under proportional transaction costs
• Arbitrage, hedging and utility maximization using semi-static trading strategies with American options
• On hedging American options under model uncertainty
• Robust discrete-time super-hedging strategies under AIP condition and under price uncertainty

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