Perturbative Approach on Financial Markets

Simone Scotti

Papers from arXiv.org

Abstract: We study the point of transition between complete and incomplete financial models thanks to Dirichlet Forms methods. We apply recent techniques, developped by Bouleau, to hedging procedures in order to perturbate parameters and stochastic processes, in the case of a volatility parameter fixed but uncertain for traders; we call this model Perturbed Black Scholes (PBS) Model. We show that this model can reproduce at the same time a smile effect and a bid-ask spread; we exhibit the volatility function associated to the local-volatility model equivalent to PBS model when vanilla options are concerned. Lastly, we present a connection between Error Theory using Dirichlet Forms and Utility Function Theory.

Date: 2008-06
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Persistent link: https://EconPapers.repec.org/RePEc:arx:papers:0806.0287

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