Updating pricing rules

Aloisio Araujo (), Alain Chateauneuf, José Heleno Faro and Bruno Holanda
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Aloisio Araujo: IMPA - Instituto Nacional de Matemática Pura e Aplicada, FGV - Fundacao Getulio Vargas [Rio de Janeiro]
José Heleno Faro: Instituto de Ensino e Pesquisa (Brazil) - Insper Institute of Education and Research
Bruno Holanda: UFG - Universidade Federal de Goiás [Goiânia]

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Abstract: This paper studies the problem of updating the super-replication prices of arbitrage-free finite financial markets with a frictionless bond. Any super-replication price is a pricing rule represented as the support function of some polytope of probabilities containing at least one strict positive probability, which captures the closure of the set of risk-neutral probabilities of any underlying market consistent with the given pricing rule. We show that a weak form of dynamic consistency characterizes the full (prior-by-prior) Bayesian updating of pricing rules. In order to study the problem of updating pricing rules revealing incomplete markets without frictions on all tradable securities, we first show that the corresponding polytope of probabilities must be non-expansible. We find that the full Bayesian updating does not preserve non-expansibility, unless a condition of non-trivial updating is satisfied. Finally, we show that the full Bayesian updating of pricing rules of efficient complete markets is completely stable. We also show that efficient complete markets with uniform bid–ask spreads are stable under full Bayesian updating, while efficient complete markets that fulfill the put–call parity are stable only under a Choquet pricing rule computed with respect to a regular concave nonadditive risk-neutral probability.

Keywords: Pricing rules; Full Bayesian update; Incomplete markets; Efficient complete markets; Bid–ask spreads (search for similar items in EconPapers)
Date: 2019-01
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Citations: View citations in EconPapers (1)

Published in Economic Theory, 2019, 68, pp.335-361. ⟨10.1007/s00199-018-1125-9⟩

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Journal Article: Updating pricing rules (2019)
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Working Paper: Updating pricing rules (2019)
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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:hal-03252329

DOI: 10.1007/s00199-018-1125-9

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