Binomial approximations of shortfall risk for game options

DOI10.1214/07-AAP503zbMATH Open1151.91504arXiv0811.1896MaRDI QIDQ957516FDOQ957516

Yan Dolinsky, Yuri Kifer

Publication date: 27 November 2008

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

Abstract: We show that the shortfall risk of binomial approximations of game (Israeli) options converges to the shortfall risk in the corresponding Black--Scholes market considering Lipschitz continuous path-dependent payoffs for both discrete- and continuous-time cases. These results are new also for usual American style options. The paper continues and extends the study of Kifer [Ann. Appl. Probab. 16 (2006) 984--1033] where estimates for binomial approximations of prices of game options were obtained. Our arguments rely, in particular, on strong invariance principle type approximations via the Skorokhod embedding, estimates from Kifer [Ann. Appl. Probab. 16 (2006) 984--1033] and the existence of optimal shortfall hedging in the discrete time established by Dolinsky and Kifer [Stochastics 79 (2007) 169--195].

Full work available at URL: https://arxiv.org/abs/0811.1896

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zbMATH Keywords

Skorokhod embeddingbinomial approximationgame optionsDynkin gamesshortfall riskcomplete and incomplete markets

Mathematics Subject Classification ID

Derivative securities (option pricing, hedging, etc.) (91G20) Strong limit theorems (60F15) 2-person games (91A05) Stochastic games, stochastic differential games (91A15)

Cites Work

• Stochastic differential equations. An introduction with applications.
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• The efficient hedging problem for American options
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• Game options
• Hedging with risk for game options in discrete time
• Optimal stopping and strong approximation theorems†
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• Optimal Stopping in Sequential Games With or Without a Constraint of Always Terminating

Cited In (8)

• The efficient hedging problem for American options
• Recombining Tree Approximations for Optimal Stopping for Diffusions
• Shortfall Risk Approximations for American Options in the Multidimensional Black-Scholes Model
• Defaultable game options in a hazard process model
• Error estimates for binomial approximations of game put options
• Dynkin's games and Israeli options
• Error estimates for binomial approximations of game options
• Limit theorems for partial hedging under transaction costs

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