English

Dynamic Conic Finance via Backward Stochastic Difference Equations

Pricing of Securities 2014-12-31 v2 Probability Risk Management

Abstract

We present an arbitrage free theoretical framework for modeling bid and ask prices of dividend paying securities in a discrete time setup using theory of dynamic acceptability indices. In the first part of the paper we develop the theory of dynamic subscale invariant performance measures, on a general probability space, and discrete time setup. We prove a representation theorem of such measures in terms of a family of dynamic convex risk measures, and provide a representation of dynamic risk measures in terms of g-expectations, and solutions of BSΔ\DeltaEs with convex drivers. We study the existence and uniqueness of the solutions, and derive a comparison theorem for corresponding BSΔ\DeltaEs. In the second part of the paper we discuss a market model for dividend paying securities by introducing the pricing operators that are defined in terms of dynamic acceptability indices, and find various properties of these operators. Using these pricing operators, we define the bid and ask prices for the underlying securities and then for derivatives in this market. We show that the obtained market model is arbitrage free, and we also prove a series of properties of these prices.

Keywords

Cite

@article{arxiv.1412.6459,
  title  = {Dynamic Conic Finance via Backward Stochastic Difference Equations},
  author = {Tomasz R. Bielecki and Igor Cialenco and Tao Chen},
  journal= {arXiv preprint arXiv:1412.6459},
  year   = {2014}
}

Comments

65 pages

R2 v1 2026-06-22T07:38:31.195Z