Two price economies in continuous time

Ernst Eberlein (), Dilip Madan (), Martijn Pistorius (), Wim Schoutens () and Marc Yor ()

Annals of Finance, 2014, vol. 10, issue 1, 100 pages

Abstract: Static and discrete time pricing operators for two price economies are reviewed and then generalized to the continuous time setting of an underlying Hunt process. The continuous time operators define nonlinear partial integro–differential equations that are solved numerically for the three valuations of bid, ask and expectation. The operators employ concave distortions by inducing a probability into the infinitesimal generator of a Hunt process. This probability is then distorted. Two nonlinear operators based on different approaches to truncating small jumps are developed and termed $$QV$$ for quadratic variation and $$NL$$ for normalized Lévy. Examples illustrate the resulting valuations. A sample book of derivatives on a single underlier is employed to display the gap between the bid and ask values for the book and the sum of comparable values for the components of the book. Copyright Springer-Verlag Berlin Heidelberg 2014

Keywords: Distorted expectation; Choquet capacity; Nonlinear expectations; G-expectations; Acceptable risks; G10; G12; G12 (search for similar items in EconPapers)
Date: 2014
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Citations: View citations in EconPapers (8)

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DOI: 10.1007/s10436-013-0228-3

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