Filtration shrinkage, the structure of deflators, and failure of market completeness

Constantinos Kardaras and Johannes Ruf

Papers from arXiv.org

Abstract: We analyse the structure of local martingale deflators projected on smaller filtrations. In a general continuous-path setting, we show that the local martingale part in the multiplicative Doob-Meyer decomposition of projected local martingale deflators are themselves local martingale deflators in the smaller information market. Via use of a Bayesian filtering approach, we demonstrate the exact mechanism of how updates on the possible class of models under less information result in the strict supermartingale property of projections of such deflators. Finally, we demonstrate that these projections are unable to span all possible local martingale deflators in the smaller information market, by investigating a situation where market completeness is not retained under filtration shrinkage.

Date: 2019-12, Revised 2020-08
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Citations: View citations in EconPapers (5)

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Persistent link: https://EconPapers.repec.org/RePEc:arx:papers:1912.04652

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