Dynamic Conic Finance: Pricing and Hedging in Market Models with Transaction Costs via Dynamic Coherent Acceptability Indices
AbstractIn this paper we present a theoretical framework for determining dynamic ask and bid prices of derivatives using the theory of dynamic coherent acceptability indices in discrete time. We prove a version of the First Fundamental Theorem of Asset Pricing using the dynamic coherent risk measures. We introduce the dynamic ask and bid prices of a derivative contract in markets with transaction costs. Based on these results, we derive a representation theorem for the dynamic bid and ask prices in terms of dynamically consistent sequence of sets of probability measures and risk-neutral measures. To illustrate our results, we compute the ask and bid prices of some path-dependent options using the dynamic Gain-Loss Ratio.
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Bibliographic InfoPaper provided by arXiv.org in its series Papers with number 1205.4790.
Date of creation: May 2012
Date of revision: Jun 2013
Publication status: Published in International Journal of Theoretical and Applied Finance, vol. 16, No 1, 2013
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Web page: http://arxiv.org/
This paper has been announced in the following NEP Reports:
- NEP-ALL-2012-05-29 (All new papers)
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