ON ARBITRAGE AND DUALITY UNDER MODEL UNCERTAINTY AND PORTFOLIO CONSTRAINTS

Erhan Bayraktar, Zhou Zhou

Research output: Contribution to journalArticlepeer-review

11 Scopus citations

Abstract

We consider the fundamental theorem of asset pricing (FTAP) and the hedging prices of options under nondominated model uncertainty and portfolio constraints in discrete time. We first show that no arbitrage holds if and only if there exists some family of probability measures such that any admissible portfolio value process is a local super-martingale under these measures. We also get the nondominated optional decomposition with constraints. From this decomposition, we obtain the duality of the super-hedging prices of European options, as well as the sub- and super-hedging prices of American options. Finally, we get the FTAP and the duality of super-hedging prices in a market where stocks are traded dynamically and options are traded statically.

Original languageEnglish (US)
Pages (from-to)988-1012
Number of pages25
JournalMathematical Finance
Volume27
Issue number4
DOIs
StatePublished - Oct 2017

Keywords

  • fundamental theorem of asset pricing
  • model uncertainty
  • optional decomposition
  • portfolio constraints
  • sub-(super-)hedging

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