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Duality for pathwise superhedging in continuous time

Author

Listed:
  • Daniel Bartl

    (Universität Wien)

  • Michael Kupper

    (Universität Konstanz)

  • David J. Prömel

    (University of Oxford)

  • Ludovic Tangpi

    (Princeton University)

Abstract

We provide a model-free pricing–hedging duality in continuous time. For a frictionless market consisting of d $d$ risky assets with continuous price trajectories, we show that the purely analytic problem of finding the minimal superhedging price of a path-dependent European option has the same value as the purely probabilistic problem of finding the supremum of the expectations of the option over all martingale measures. The superhedging problem is formulated with simple trading strategies, the claim is the limit inferior of continuous functions, which allows upper and lower semi-continuous claims, and superhedging is required in the pathwise sense on a σ $\sigma $ -compact sample space of price trajectories. If the sample space is stable under stopping, the probabilistic problem reduces to finding the supremum over all martingale measures with compact support. As an application of the general results, we deduce dualities for Vovk’s outer measure and semi-static superhedging with finitely many securities.

Suggested Citation

  • Daniel Bartl & Michael Kupper & David J. Prömel & Ludovic Tangpi, 2019. "Duality for pathwise superhedging in continuous time," Finance and Stochastics, Springer, vol. 23(3), pages 697-728, July.
    • Handle: RePEc:spr:finsto:v:23:y:2019:i:3:d:10.1007_s00780-019-00395-2
    DOI: 10.1007/s00780-019-00395-2
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    Full references (including those not matched with items on IDEAS)

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    Cited by:

    1. Matteo Burzoni & Marco Maggis, 2019. "Arbitrage-free modeling under Knightian Uncertainty," Papers 1909.04602, arXiv.org, revised Apr 2020.
    2. Daniel Bartl & Michael Kupper & Ariel Neufeld, 2021. "Duality theory for robust utility maximisation," Finance and Stochastics, Springer, vol. 25(3), pages 469-503, July.
    3. Francesca Biagini & Thomas Reitsam, 2021. "A dynamic version of the super-replication theorem under proportional transaction costs," Papers 2107.02628, arXiv.org.
    4. Francesca Biagini & Lukas Gonon & Thomas Reitsam, 2023. "Neural network approximation for superhedging prices," Mathematical Finance, Wiley Blackwell, vol. 33(1), pages 146-184, January.
    5. Daniel Bartl & Michael Kupper & Ariel Neufeld, 2020. "Pathwise superhedging on prediction sets," Finance and Stochastics, Springer, vol. 24(1), pages 215-248, January.
    6. Huy N. Chau & Masaaki Fukasawa & Miklos Rasonyi, 2021. "Super-replication with transaction costs under model uncertainty for continuous processes," Papers 2102.02298, arXiv.org.
    7. Christian Bender & Sebastian Ferrando & Alfredo Gonzalez, 2021. "Model-Free Finance and Non-Lattice Integration," Papers 2105.10623, arXiv.org.
    8. Hölzermann, Julian, 2020. "Pricing Interest Rate Derivatives under Volatility Uncertainty," Center for Mathematical Economics Working Papers 633, Center for Mathematical Economics, Bielefeld University.
    9. Alessandro Doldi & Marco Frittelli, 2023. "Entropy martingale optimal transport and nonlinear pricing–hedging duality," Finance and Stochastics, Springer, vol. 27(2), pages 255-304, April.
    10. Henry Chiu & Rama Cont, 2023. "A model‐free approach to continuous‐time finance," Mathematical Finance, Wiley Blackwell, vol. 33(2), pages 257-273, April.
    11. Ariel Neufeld & Julian Sester, 2021. "Model-free price bounds under dynamic option trading," Papers 2101.01024, arXiv.org, revised Jul 2021.
    12. Daniel Bartl & Michael Kupper & Ariel Neufeld, 2020. "Duality Theory for Robust Utility Maximisation," Papers 2007.08376, arXiv.org, revised Jun 2021.
    13. Julian Holzermann, 2020. "Pricing Interest Rate Derivatives under Volatility Uncertainty," Papers 2003.04606, arXiv.org, revised Nov 2021.
    14. Henry Chiu & Rama Cont, 2022. "A model-free approach to continuous-time finance," Papers 2211.15531, arXiv.org.
    15. Huy N. Chau & Masaaki Fukasawa & Miklós Rásonyi, 2022. "Super‐replication with transaction costs under model uncertainty for continuous processes," Mathematical Finance, Wiley Blackwell, vol. 32(4), pages 1066-1085, October.
    16. Ariel Neufeld & Antonis Papapantoleon & Qikun Xiang, 2020. "Model-free bounds for multi-asset options using option-implied information and their exact computation," Papers 2006.14288, arXiv.org, revised Jan 2022.
    17. Ariel Neufeld & Antonis Papapantoleon & Qikun Xiang, 2023. "Model-Free Bounds for Multi-Asset Options Using Option-Implied Information and Their Exact Computation," Management Science, INFORMS, vol. 69(4), pages 2051-2068, April.
    18. Francesca Biagini & Lukas Gonon & Thomas Reitsam, 2021. "Neural network approximation for superhedging prices," Papers 2107.14113, arXiv.org.

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    More about this item

    Keywords

    Pathwise superhedging; Pricing–hedging duality; Vovk’s outer measure; Semi-static hedging; Martingale measures; σ $sigma $ -compactness;
    All these keywords.

    JEL classification:

    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing

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