2014/11/05 by Peter Bank, Bank, Peter, Yan Dolinsky +3
Economics, Econometrics and Finance · #Stochastic processes and financial applications #Financial Markets and Investment Strategies #Financial Risk and Volatility Modeling
paper · pdf · doi:10.48550/arxiv.1411.1229
We study super-replication of contingent claims in an illiquid market with\nmodel uncertainty. Illiquidity is captured by nonlinear transaction costs in\ndiscrete time and model uncertainty arises as our only assumption on stock\nprice returns is that they are in a range specified by fixed volatility bounds.\nWe provide a dual characterization of super-replication prices as a supremum of\npenalized expectations for the contingent claim's payoff. We also describe the\nscaling limit of this dual representation when the number of trading periods\nincreases to infinity. Hence, this paper complements the results in [11] and\n[19] for the case of model uncertainty.\n