2012/11/28 by Peng, Shige
#60H05 #60H10 #FOS: Economics and business #Pricing of Securities (q-fin.PR)
paper · doi:10.48550/arxiv.1211.6525
In this paper we study dynamic pricing mechanism of contingent claims. A typical model of such pricing mechanism is the so-called g-expectation Egs,t[X] defined by the solution of the backward stochastic differential equation with generator g and with the contingent claim X as terminal condition. The generating function g this BSDE. We also provide examples of determining the price generating function g=g(y,z) by testing. The main result of this paper is as follows: if a given dynamic pricing mechanism is Egμ-dominated, i.e., the criteria (A5) Es,t[X]-Es,t[X']≤ Egμs,t[X-X'] is satisfied for a large enough μ> 0, where gμ=gμ(|y|+|z|), then Es,t is a g-pricing mechanism. This domination condition was statistically tested using CME data documents. The result of test is significantly positive.