13,553 research outputs found
The fundamental theorem of asset pricing, the hedging problem and maximal claims in financial markets with short sales prohibitions
This paper consists of two parts. In the first part we prove the fundamental
theorem of asset pricing under short sales prohibitions in continuous-time
financial models where asset prices are driven by nonnegative, locally bounded
semimartingales. A key step in this proof is an extension of a well-known
result of Ansel and Stricker. In the second part we study the hedging problem
in these models and connect it to a properly defined property of "maximality"
of contingent claims.Comment: Published in at http://dx.doi.org/10.1214/12-AAP914 the Annals of
Applied Probability (http://www.imstat.org/aap/) by the Institute of
Mathematical Statistics (http://www.imstat.org
A non-arbitrage liquidity model with observable parameters for derivatives
We develop a parameterised model for liquidity effects arising from the trading in an asset. Liquidity is defined via a combination of a trader's individual transaction cost and a price slippage impact, which is felt by all market participants. The chosen definition allows liquidity to be observable in a centralised order-book of an asset as is usually provided in most non-specialist exchanges. The discrete-time version of the model is based on the CRR binomial tree and in the appropriate continuous-time limits we derive various nonlinear partial differential equations. Both versions can be directly applied to the pricing and hedging of options; the nonlinear nature of liquidity leads to natural bid-ask spreads that are based on the liquidity of the market for the underlying and the existence of (super-)replication strategies. We test and calibrate our model set-up empirically with high-frequency data of German blue chips and discuss further extensions to the model, including stochastic liquidity
Superhedging in illiquid markets
We study contingent claims in a discrete-time market model where trading
costs are given by convex functions and portfolios are constrained by convex
sets. In addition to classical frictionless markets and markets with
transaction costs or bid-ask spreads, our framework covers markets with
nonlinear illiquidity effects for large instantaneous trades. We derive dual
characterizations of superhedging conditions for contingent claim processes in
a market without a cash account. The characterizations are given in terms of
stochastic discount factors that correspond to martingale densities in a market
with a cash account. The dual representations are valid under a topological
condition and a weak consistency condition reminiscent of the ``law of one
price'', both of which are implied by the no arbitrage condition in the case of
classical perfectly liquid market models. We give alternative sufficient
conditions that apply to market models with nonlinear cost functions and
portfolio constraints
Can Cross-Border Financial Markets Create Endogenously Good Collateral in a Crisis?
In this paper, we explore whether markets can create endogenously good collateral in a crisis by analyzing a simple exchange economy where a country-specific catastrophic shock is shared between two countries. To see this possibility, we examine whether the equilibrium achieved by the time-0 complete markets with solvency constraints can be recovered in the dynamically complete markets with collateral constraints. This paper demonstrates that it is possible to recover the time-0 equilibrium outcome in a sequential manner when pricing errors occur randomly in evaluating Lucas trees at a catastrophic event. Such stochastic components may be interpreted as a policy initiative to create good collateral and yield constrained efficient outcomes at crisis periods.Solvency Constraints, Collateral Constraints, Dynamic Optimal Contract, Catastrophic Shocks
Valuations and dynamic convex risk measures
This paper approaches the definition and properties of dynamic convex risk
measures through the notion of a family of concave valuation operators
satisfying certain simple and credible axioms. Exploring these in the simplest
context of a finite time set and finite sample space, we find natural
risk-transfer and time-consistency properties for a firm seeking to spread its
risk across a group of subsidiaries.Comment: 26 page
Distribution Risk and Equity Returns
In this paper we entertain the hypothesis that observed variations in income shares are the result of changes in the balance of power between workers and capital owners in labor relations. We show that this view implies that income share variations represent a risk factor of ¯rst-order importance for the owners of capital and, consequently, are a crucial determinant of the return to equity. When both risks are calibrated to observations, this distribution risk dominates in importance the usual systematic risk for the pricing of assets. We also show that distribution risks may originate in non-traded idiosyncratic income shocks.income shares; distribution risk; equity premium; limited market participation
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