On Azéma-Yor processes, their optimal properties and the Bachelier-drawdown equation

DOI10.1214/10-AOP614zbMATH Open1239.60031arXiv0902.1328OpenAlexW3125796373MaRDI QIDQ662437FDOQ662437

Jan Obłój, Nicole El Karoui, Laurent Carraro

Publication date: 22 February 2012

Published in: The Annals of Probability (Search for Journal in Brave)

Abstract: We study the class of Az'ema-Yor processes defined from a general semimartingale with a continuous running maximum process. We show that they arise as unique strong solutions of the Bachelier stochastic differential equation which we prove is equivalent to the drawdown equation. Solutions of the latter have the drawdown property: they always stay above a given function of their past maximum. We then show that any process which satisfies the drawdown property is in fact an Az'ema-Yor process. The proofs exploit group structure of the set of Az'ema-Yor processes, indexed by functions, which we introduce. We investigate in detail Az'ema-Yor martingales defined from a nonnegative local martingale converging to zero at infinity. We establish relations between average value at risk, drawdown function, Hardy-Littlewood transform and its inverse. In particular, we construct Az'ema-Yor martingales with a given terminal law and this allows us to rediscover the Az'ema-Yor solution to the Skorokhod embedding problem. Finally, we characterize Az'ema-Yor martingales showing they are optimal relative to the concave ordering of terminal variables among martingales whose maximum dominates stochastically a given benchmark.

Full work available at URL: https://arxiv.org/abs/0902.1328

zbMATH Keywords

average value-at-riskSkorokhod embedding problemstochastic orderdrawdownBachelier-drawdown equationconcave orderHardy-Littlewood transformAzéma-Yor process

Mathematics Subject Classification ID

Stochastic ordinary differential equations (aspects of stochastic analysis) (60H10) Martingales with continuous parameter (60G44)

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Cited In (19)

• The maximum maximum of a martingale with given \(n\) marginals
• On taxed spectrally negative Lévy processes with draw-down stopping
• On joint distributions of the maximum, minimum and terminal value of a continuous uniformly integrable martingale
• Exit problems for general draw-down times of spectrally negative Lévy processes
• The Joint Law of a Max-Continuous Local Submartingale and Its Maximum
• Azéma martingales for Bessel and CIR processes and the pricing of Parisian zero‐coupon bonds
• Remarks on Föllmer's pathwise Itô calculus
• On the drawdown of completely asymmetric Lévy processes
• The incentives of hedge fund fees and high-water marks
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• Dividend payments until draw-down time for risk models driven by spectrally negative Lévy processes
• Martingale Inequalities for the Maximum via Pathwise Arguments
• On some universal \(\sigma\)-finite measures related to a remarkable class of submartingales
• THE NUMÉRAIRE PROPERTY AND LONG-TERM GROWTH OPTIMALITY FOR DRAWDOWN-CONSTRAINED INVESTMENTS
• Some contributions to the study of stochastic processes of the classes and
• Portfolio optimisation under non-linear drawdown constraints in a semimartingale financial model
• Geometry of vectorial martingale optimal transportations and duality
• Asset management with endogenous withdrawals under a drawdown constraint
• Two explicit Skorokhod embeddings for simple symmetric random walk

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