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

DOI10.1142/S0219024917500364MaRDI QIDQ5367496zbMATHFDO

Authors Erhan Bayraktar, Zhou Zhou

Publication date 13 October 2017

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

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

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)

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.

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Cites work

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

Cited in

(13)

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

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