Comparisons for backward stochastic differential equations on Markov chains and related no-arbitrage conditions

Samuel N. Cohen and Robert J. Elliott

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Abstract: Most previous contributions to BSDEs, and the related theories of nonlinear expectation and dynamic risk measures, have been in the framework of continuous time diffusions or jump diffusions. Using solutions of BSDEs on spaces related to finite state, continuous time Markov chains, we develop a theory of nonlinear expectations in the spirit of [Dynamically consistent nonlinear evaluations and expectations (2005) Shandong Univ.]. We prove basic properties of these expectations and show their applications to dynamic risk measures on such spaces. In particular, we prove comparison theorems for scalar and vector valued solutions to BSDEs, and discuss arbitrage and risk measures in the scalar case.

Date: 2008-09, Revised 2010-01
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Citations: View citations in EconPapers (21)

Published in Annals of Applied Probability 2010, Vol. 20, No. 1, 267-311

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Persistent link: https://EconPapers.repec.org/RePEc:arx:papers:0810.0055

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