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Model-independent pricing with insider information: a Skorokhod embedding approach

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Listed:
  • Beatrice Acciaio
  • Alexander M. G. Cox
  • Martin Huesmann

Abstract

In this paper, we consider the pricing and hedging of a financial derivative for an insider trader, in a model-independent setting. In particular, we suppose that the insider wants to act in a way which is independent of any modelling assumptions, but that she observes market information in the form of the prices of vanilla call options on the asset. We also assume that both the insider's information, which takes the form of a set of impossible paths, and the payoff of the derivative are time-invariant. This setup allows us to adapt recent work of Beiglboeck, Cox and Huesmann (2016) to prove duality results and a monotonicity principle, which enables us to determine geometric properties of the optimal models. Moreover, we show that this setup is powerful, in that we are able to find analytic and numerical solutions to certain pricing and hedging problems.

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  • Beatrice Acciaio & Alexander M. G. Cox & Martin Huesmann, 2016. "Model-independent pricing with insider information: a Skorokhod embedding approach," Papers 1610.09124, arXiv.org, revised Jun 2020.
    • Handle: RePEc:arx:papers:1610.09124
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    References listed on IDEAS

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    1. Peter Carr & Roger Lee, 2010. "Hedging variance options on continuous semimartingales," Finance and Stochastics, Springer, vol. 14(2), pages 179-207, April.
    2. Alfred Galichon & Pierre Henri-Labordère & Nizar Touzi, 2013. "A stochastic control approach to No-Arbitrage bounds given marginals, with an application to Lookback options," Sciences Po publications info:hdl:2441/5rkqqmvrn4t, Sciences Po.
    3. Alexander M. G. Cox & Jiajie Wang, 2011. "Root's barrier: Construction, optimality and applications to variance options," Papers 1104.3583, arXiv.org, revised Mar 2013.
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