FINANCIAL FINANCE

Dilip B. Madan and King Wang
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Dilip B. Madan: Robert H. Smith School of Business, University of Maryland, College Park, MD 20742, USA
King Wang: Derivative Product Strats, Morgan Stanley, 1585 Broadway, 5th Floor, New York, NY 10036, USA

International Journal of Theoretical and Applied Finance (IJTAF), 2024, vol. 27, issue 03n04, 1-27

Abstract: Strategies for selecting base probability measures that both respect market valuations of traded cash flows and simultaneously monitor departures from physical measures are suggested, proposed and implemented in an illustrative option hedging context. Mathematical objectives for financial decision making that are financial are advocated and developed using the theory of nonlinear expectations. Financial objectives should equate the additional value of a dollar to a dollar. More exactly, the value of a claim paying out an additional dollar, should exceed the original claim value by a dollar.

Keywords: Bilateral gamma model; Hellinger distance; risk premium singularity; power variations; Wasserstein distance (search for similar items in EconPapers)
JEL-codes: G10 G11 G12 (search for similar items in EconPapers)
Date: 2024
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DOI: 10.1142/S0219024924500110

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