Pricing without no-arbitrage condition in discrete time

Laurence Carassus and Emmanuel L\'epinette

Papers from arXiv.org

Abstract: In a discrete time setting, we study the central problem of giving a fair price to some financial product. For several decades, the no-arbitrage conditions and the martingale measures have played a major role for solving this problem. We propose a new approach for estimating the super-replication cost based on convex duality instead of martingale measures duality: The prices are expressed using Fenchel conjugate and bi-conjugate without using any no-arbitrage condition.The super-hedging problem resolution leads endogenously to a weak no-arbitrage condition called Absence of Instantaneous Profit (AIP) under which prices are finite. We study this condition in details, propose several characterizations and compare it to the no-arbitrage condition.

Date: 2021-04
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