Strict Local Martingale Deflators and Pricing American Call-Type Options
Erhan Bayraktar, Constantinos Kardaras, Hao Xing
TL;DR
This paper addresses the challenge of pricing American call options in markets lacking an equivalent local martingale measure, providing solutions to an open problem in stochastic portfolio theory.
Contribution
It introduces a framework for pricing and exercising American call options without the need for an equivalent local martingale measure, advancing theoretical understanding.
Findings
Provides a method for option pricing in non-martingale markets
Resolves an open question in stochastic portfolio theory
Extends the theory of local martingale deflators
Abstract
We solve the problem of pricing and optimal exercise of American call-type options in markets which do not necessarily admit an equivalent local martingale measure. This resolves an open question proposed by Fernholz and Karatzas [Stochastic Portfolio Theory: A Survey, Handbook of Numerical Analysis, 15:89-168, 2009].
Peer Reviews
No public reviews on file for this paper yet. If you reviewed it on a platform where reviews are public (OpenReview, ICLR, NeurIPS, ICML), you can paste yours below so the community can read it here.
Videos
No videos yet. Explain this paper in a talk, walkthrough, or lecture? Add one.
Taxonomy
TopicsStochastic processes and financial applications · Capital Investment and Risk Analysis · Financial Markets and Investment Strategies