Characterisation of Honest Times and Optional Semimartingales of Class- $$(\Sigma )$$ ( Σ )

Libo Li ()
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Libo Li: University of New South Wales

Journal of Theoretical Probability, 2022, vol. 35, issue 4, 2145-2175

Abstract: Abstract Given a finite honest time, we first show that the associated Azéma optional supermartingale can be expressed as the drawdown and the relative drawdown of some local optional supermartingales with continuous running supremum. The relative drawdown representation then allows us to provide a characterisation of finite honest times using a family of non-negative local optional supermartingales with continuous running supremum which converges to zero at infinity. Then we extend the notion of semimartingales of class- $$(\Sigma )$$ ( Σ ) by allowing for jumps in its finite variation part of the semimartingale decomposition. This enables one to establish the Madan–Roynette–Yor option pricing formula for a larger class of processes, and finally, we apply the extended formula to the construction of finite honest times.

Keywords: Honest times; Azéma’s supermartingale; Additive decomposition; Multiplicative decomposition; Optional semimartingales; Làglàd processes; Semimartingales of class-sigma; Drawdown; Relative drawdown; 60G07; 91G40 (search for similar items in EconPapers)
Date: 2022
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DOI: 10.1007/s10959-021-01154-w

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