Self-dual continuous processes

DOI10.1016/J.SPA.2013.01.008MaRDI QIDQ1947605zbMATH OpenOpenAlexFDO

Authors Thorsten Rheinländer, Michael Schmutz

Publication date 22 April 2013

Published in Stochastic Processes and their Applications (Search for Journal in Brave)

Full work available at URL https://arxiv.org/abs/1201.6516

zbMATH Keywords

continuous semimartignalesOcone martingalesself-dual processessemi-static hedging

Mathematics Subject Classification ID

Martingales with continuous parameter (60G44) Derivative securities (option pricing, hedging, etc.) (91G20)

Abstract: The important application of semi-static hedging in financial markets naturally leads to the notion of quasi self-dual processes which is, for continuous semimartingales, related to symmetry properties of both their ordinary as well as their stochastic logarithms. We provide a structure result for continuous quasi self-dual processes. Moreover, we give a characterisation of continuous Ocone martingales via a strong version of self-duality.

Review text

A hedging strategy is called semi-static when trading takes place at inception and at a finite number of stopping times, e.g. hitting times of barriers. It is well known by now that one can semi-statically hedge path-dependent derivatives, e.g. barrier options, using European options. However, in order to implement this strategy the asset price process should satisfy a certain symmetry property known as self-duality. This paper is devoted to the study of stochastic processes with continuous paths that are self-dual. In particular, the authors provide a structural characterization of continuous semimartingales that are conditionally (quasi) self-dual. Moreover, they prove that a continuous martingale is an Ocone martingale if and only if its stochastic exponential is strongly self-dual.

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Cited in

(7)

• A dual characterization of self-generation and exponential forward performances
• Duality theory for self-similar processes
• A transitivity property of Ocone martingales
• Semi-analytical prices for lookback and barrier options under the Heston model
• Quasi-self-dual exponential Lévy processes
• Analytical pricing of single barrier options under local volatility models
• Valuation of barrier options via a general self-duality

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