Dry Markets and Superreplication Bounds of American Derivatives

João Amaro de Matos () and Ana Lacerda

FEUNL Working Paper Series from Universidade Nova de Lisboa, Faculdade de Economia

Abstract: This paper studies the impact of dry markets for underlying assets on the pricing of American derivatives, using a disrete time framework. Dry markets are characterized by the possibility of non-existence of trading at certain dates. Such non-existence may be deterministic or probabilistic. Using superreplicating strategies, we derive expectation representations for the range of arbitrage-free values of the dervatives. In the probabilistic case, if we consider an enlarged filtration induced by the price process and the market existence process, ordinary stopping times are required. If not, randomized stopping times are required. Several comparisons of the ranges obtained with the two market restrictions are performed. Finally, we conclude that arbitrage arguments are not enough to define the optimal exercise policy.

Keywords: American derivatives; pricing; incomplete markets; dry markets; superreplication; randomized stopping times; strong duality (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cfn, nep-fin and nep-fmk
Date: 2004
View list of references

Downloads: (external link)
http://fesrvsd.fe.unl.pt/WPFEUNL/WP2004/wp461.pdf

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: http://EconPapers.repec.org/RePEc:unl:unlfep:wp461

Access Statistics for this paper

More papers in FEUNL Working Paper Series from Universidade Nova de Lisboa, Faculdade de Economia
Series data maintained by Lourdes Gouveia ().