Pricing principle via Tsallis relative entropy in incomplete market

Dejian Tian

Papers from arXiv.org

Abstract: A pricing principle is introduced for non-attainable $q$-exponential bounded contingent claims in an incomplete Brownian motion market setting. The buyer evaluates the contingent claim under the ``distorted Radon-Nikodym derivative'' and adjustment by Tsallis relative entropy over a family of equivalent martingale measures. The pricing principle is proved to be a time consistent and arbitrage-free pricing rule. More importantly, this pricing principle is found to be closely related to backward stochastic differential equations with generators $f(y)|z|^2$ type. The pricing functional is compatible with prices for attainable claims. Except translation invariance, the pricing principle processes lots of elegant properties such as monotonicity and concavity etc. The pricing functional is showed between minimal martingale measure pricing and conditional certainty equivalent pricing under $q$-exponential utility. The asymptotic behavior of the pricing principle for ambiguity aversion coefficient is also investigated.

Date: 2022-01, Revised 2022-10
New Economics Papers: this item is included in nep-cwa and nep-upt
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