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Explicit description of all deflators for market models under random horizon with applications to NFLVR

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  • Choulli, Tahir
  • Yansori, Sina

Abstract

This paper considers an initial market model, specified by its underlying assets S and its flow of information F, and an arbitrary random time τ which might not be an F-stopping time. As the death time and the default time (that τ might represent) can be seen when they occur only, the progressive enlargement of F with τ sounds tailor-fit for modeling the new flow of information G that incorporates both F and τ. In this setting of informational market, the first principal goal resides in describing as explicitly as possible the set of all deflators for (Sτ,G), while the second principal goal lies in addressing the No-Free-Lunch-with-Vanishing-Risk concept (NFLVR hereafter) for (Sτ,G). Besides this direct application to NFLVR, the set of all deflators constitutes the dual set of all “admissible” wealth processes for the stopped model (Sτ,G), and hence it is vital in many hedging and pricing related optimization problems. Thanks to the results of Choulli et al. (2020), on martingales classification and representation for progressive enlarged filtration, our two main goals are fully achieved in different versions, when the survival probability never vanishes. The results are illustrated on the two particular cases when (S,F) follows the jump-diffusion model and the discrete-time model.

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  • Choulli, Tahir & Yansori, Sina, 2022. "Explicit description of all deflators for market models under random horizon with applications to NFLVR," Stochastic Processes and their Applications, Elsevier, vol. 151(C), pages 230-264.
    • Handle: RePEc:eee:spapps:v:151:y:2022:i:c:p:230-264
    DOI: 10.1016/j.spa.2022.05.011
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    References listed on IDEAS

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    1. Acciaio, Beatrice & Fontana, Claudio & Kardaras, Constantinos, 2016. "Arbitrage of the first kind and filtration enlargements in semimartingale financial models," Stochastic Processes and their Applications, Elsevier, vol. 126(6), pages 1761-1784.
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    9. Choulli, Tahir & Stricker, Christophe, 2009. "Comparing the minimal Hellinger martingale measure of order q to the q-optimal martingale measure," Stochastic Processes and their Applications, Elsevier, vol. 119(4), pages 1368-1385, April.
    10. Stefan Ankirchner & Jakub Zwierz, 2011. "Initial Enlargement of Filtrations and Entropy of Poisson Compensators," Journal of Theoretical Probability, Springer, vol. 24(1), pages 93-117, March.
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    13. Tahir Choulli & Catherine Daveloose & Michèle Vanmaele, 2020. "A martingale representation theorem and valuation of defaultable securities," Mathematical Finance, Wiley Blackwell, vol. 30(4), pages 1527-1564, October.
    14. Aksamit, Anna & Choulli, Tahir & Deng, Jun & Jeanblanc, Monique, 2019. "No-arbitrage under additional information for thin semimartingale models," Stochastic Processes and their Applications, Elsevier, vol. 129(9), pages 3080-3115.
    15. Tahir Choulli & Sina Yansori, 2022. "Log-optimal and numéraire portfolios for market models stopped at a random time," Finance and Stochastics, Springer, vol. 26(3), pages 535-585, July.
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    Cited by:

    1. Libo Li & Ruyi Liu & Marek Rutkowski, 2022. "Vulnerable European and American Options in a Market Model with Optional Hazard Process," Papers 2212.12860, arXiv.org.

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