Dual representation of superhedging costs in illiquid markets

TY - JOUR

T1 - Dual representation of superhedging costs in illiquid markets

AU - Pennanen, Teemu

PY - 2012

Y1 - 2012

N2 - This paper studies superhedging of contingent claims in illiquid markets where trading costs may depend nonlinearly on the traded amounts and portfolios may be subject to constraints. We give dual expressions for superhedging costs of financial contracts where claims and premiums are paid possibly at multiple points in time. Besides classical pricing problems, this setup covers various swap and insurance contracts where premiums are paid in sequences. Validity of the dual expressions is proved under new relaxed conditions related to the classical no-arbitrage condition. A new version of the fundamental theorem of asset pricing is given for unconstrained models with nonlinear trading costs.

AB - This paper studies superhedging of contingent claims in illiquid markets where trading costs may depend nonlinearly on the traded amounts and portfolios may be subject to constraints. We give dual expressions for superhedging costs of financial contracts where claims and premiums are paid possibly at multiple points in time. Besides classical pricing problems, this setup covers various swap and insurance contracts where premiums are paid in sequences. Validity of the dual expressions is proved under new relaxed conditions related to the classical no-arbitrage condition. A new version of the fundamental theorem of asset pricing is given for unconstrained models with nonlinear trading costs.

U2 - 10.1007/s11579-012-0061-x

DO - 10.1007/s11579-012-0061-x

M3 - Article

SN - 1862-9679

VL - 5

SP - 233

EP - 248

JO - Mathematics and Financial Economics

JF - Mathematics and Financial Economics

IS - 4

ER -