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Consistent price systems and face-lifting pricing under transaction costs

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  • Paolo Guasoni
  • Mikl'os R'asonyi
  • Walter Schachermayer

Abstract

In markets with transaction costs, consistent price systems play the same role as martingale measures in frictionless markets. We prove that if a continuous price process has conditional full support, then it admits consistent price systems for arbitrarily small transaction costs. This result applies to a large class of Markovian and non-Markovian models, including geometric fractional Brownian motion. Using the constructed price systems, we show, under very general assumptions, the following ``face-lifting'' result: the asymptotic superreplication price of a European contingent claim $g(S_T)$ equals $\hat{g}(S_0)$, where $\hat{g}$ is the concave envelope of $g$ and $S_t$ is the price of the asset at time $t$. This theorem generalizes similar results obtained for diffusion processes to processes with conditional full support.

Suggested Citation

  • Paolo Guasoni & Mikl'os R'asonyi & Walter Schachermayer, 2008. "Consistent price systems and face-lifting pricing under transaction costs," Papers 0803.4416, arXiv.org.
  • Handle: RePEc:arx:papers:0803.4416
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    References listed on IDEAS

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