Related papers: Asset Pricing in an Imperfect World

We present a methodology for representing probabilistic relationships in a general-equilibrium economic model. Specifically, we define a precise mapping from a Bayesian network with binary nodes to a market price system where consumers and…

Employing probabilistic techniques we compute best possible upper and lower bounds on the price of an option on one or two assets with continuous piecewise linear payoff function based on prices of simple call options of possibly distinct…

We prove a version of the fundamental theorem of asset pricing (FTAP) in continuous time that is based on the strict no-arbitrage condition and that is applicable to both frictionless markets and markets with proportional transaction costs.…

In a discrete-time setting, we study arbitrage concepts in the presence of convex trading constraints. We show that solvability of portfolio optimization problems is equivalent to absence of arbitrage of the first kind, a condition weaker…

We develop the fundamental theorem of asset pricing in a probability-free infinite-dimensional setup. We replace the usual assumption of a prior probability by a certain continuity property in the state variable. Probabilities enter then…

We explore a decomposition in which returns on a large class of portfolios relative to the market depend on a smooth non-negative drift and changes in the asset price distribution. This decomposition is obtained using general continuous…

With model uncertainty characterized by a convex, possibly non-dominated set of probability measures, the agent minimizes the cost of hedging a path dependent contingent claim with given expected success ratio, in a discrete-time,…

This article provides a self-contained overview of the theory of rational asset price bubbles. We cover topics from basic definitions, properties, and classical results to frontier research, with an emphasis on bubbles attached to real…

Value adjustment of uncollateralized trades is determined within a risk-neutral pricing framework. When hedging such trades, investors cannot freely trade protection on their own name, thus facing an incomplete market. This fact is…

We show that the results of ArXiv:1305.6008 on the Fundamental Theorem of Asset Pricing and the super-hedging theorem can be extended to the case in which the options available for static hedging (\emph{hedging options}) are quoted with…

We investigate the possibility of completing financial markets in a model with no exogenous probability measure and market imperfections. A necessary and sufficient condition is obtained for such extension to be possible.

We introduce a discrete binary tree for pricing contingent claims with the underlying security prices exhibiting history dependence characteristic of that induced by market microstructure phenomena. Example dependencies considered include…

We unify and establish equivalence between the pathwise and the quasi-sure approaches to robust modelling of financial markets in discrete time. In particular, we prove a Fundamental Theorem of Asset Pricing and a Superhedging Theorem,…

Economic models may exhibit incompleteness depending on whether or not they admit certain policy-relevant features such as strategic interaction, self-selection, or state dependence. We develop a novel test of model incompleteness and…

A financial market model where agents trade using realistic combinations of buy-and-hold strategies is considered. Minimal assumptions are made on the discounted asset-price process - in particular, the semimartingale property is not…

This paper considers utility indifference valuation of derivatives under model uncertainty and trading constraints, where the utility is formulated as an additive stochastic differential utility of both intertemporal consumption and…

Existing approaches to asset-pricing under model-uncertainty adapt classical utility-maximization frameworks and seek theoretical comprehensiveness. We move toward practice by considering binary model-risks and by emphasizing 'constraints'…

We consider the problem of optimal hedging in an incomplete market with an established pricing kernel. In such a market, prices are uniquely determined, but perfect hedges are usually not available. We work in the rather general setting of…

No-arbitrage asset pricing characterizes valuation through the existence of equivalent martingale measures relative to a filtration and a class of admissible trading strategies. In practice, pricing is performed across multiple asset…

In this paper, we propose an equilibrium pricing model in a dynamic multi-period stochastic framework with uncertain income streams. In an incomplete market, there exist two traded risky assets (e.g. stock/commodity and weather derivative)…