By Hansjörg Albrecher, Walter Schachermayer, Wolfgang J. Runggaldier
This publication is a suite of cutting-edge surveys on numerous issues in mathematical finance, with an emphasis on fresh modelling and computational methods. the amount is said to a 'Special Semester on Stochastics with Emphasis on Finance' that happened from September to December 2008 on the Johann Radon Institute for Computational and utilized arithmetic of the Austrian Academy of Sciences in Linz, Austria.
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Extra info for Advanced Financial Modelling (Radon Series on Computational and Applied Mathematics)
44 D. Becherer Proof. ) by the definition of Qngd , since | − ξ + η|2 = |ξ|2 + |η|2 ≤ h2 ⊥ with equality holding for η¯ := h2 − |ξt |2 Π⊥ t (Z)/|Πt (Z)|. 5). 1, we have Yt = Et [X] for η = η Q and Ytη¯ = EtQ [X]. 6). Dynamic good-deal hedging We are going to show in this section, that a hedging strategy which minimises a suitable dynamic coherent risk measure is naturally linked to the good-deal valuation bounds. To this end, let P ngd denote the set of those equivalent probability measures Q whose density process is of the form E( λdW ) for a predictable bounded process λ with |λ| ≤ h, that is P ngd := Q∼P dQ dP F =E λdW for λ predictable with |λ| ≤ h .
5 Good-deal valuation and hedging via BSDEs In this section, we obtain a dynamic description for the good-deal valuation bounds, that arise from no-good-deal restrictions on optimal expected growth rates. The valuation bounds are given by the solutions to standard non-linear backward SDEs, whose generator satisfies a Lipschitz condition. Moreover, we develop a corresponding notion of hedging and show that also the hedging strategy is described by a BSDE. 8, let us define for X ∈ L2 (P ) ⊃ L∞ πtu (X) := ess sup EtQ [X] , Q∈Qngd t ≤ T¯ .
For example, a natural (globally uniform) lower bound for stocks would be zero. e. ϑ ∈ L(S)), describing the numbers of risky assets to be held dynamically over time. The wealth process of such strategy is given by V = V0 + ϑ · S = V0 + ϑdS . Since we will be interested in the returns Vt /Vs (s ≤ t ≤ T¯) of wealth processes that are strictly positive, it is convenient to normalise initial wealth to one by simple scaling. 1) as the family of all strictly positive wealth processes starting at one.