A theoretical framework for the pricing of contingent claims in the presence of model uncertainty

Details A theoretical framework for the pricing of contingent claims in the presence of model uncertainty A theoretical framework for the pricing of contingent claims in the presence of model uncertainty

2006-07-05

arxiv.org/abs/math/0607111v1

Annals of Applied Probability 2006, Vol. 16, No. 2, 827-852

Mathematics

Probability

Published at http://dx.doi.org/10.1214/105051606000000169 in the Annals of Applied Probability (http://www.imstat.org/aap/) by

Scientific paper

10.1214/105051606000000169

The aim of this work is to evaluate the cheapest superreplication price of a general (possibly path-dependent) European contingent claim in a context where the model is uncertain. This setting is a generalization of the uncertain volatility model (UVM) introduced in by Avellaneda, Levy and Paras. The uncertainty is specified by a family of martingale probability measures which may not be dominated. We obtain a partial characterization result and a full characterization which extends Avellaneda, Levy and Paras results in the UVM case.

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