WIAS Preprint No. 1110, (2006)

No-arbitrage pricing beyond semimartingales



Authors

  • Bender, Christian
  • Sottinen, Tommi
  • Valkeila, Esko

2010 Mathematics Subject Classification

  • 91B28 91B70 60G15 60H05

Keywords

  • arbitrage, pricing, quadratic variation, robust hedging, stylized facts

Abstract

We show how no-arbitrage pricing can be extended to some non-semimartingale models by restricting the class of admissible strategies. However, this restricted class is big enough to cover hedges for relevant options. Moreover, we show that the hedging prices depend essentially only on a path property of the stock price process, viz. on the quadratic variation. As a consequence we can incorporate many stylized facts to a pricing model without changing the option prices.

Appeared in

  • Finance Stoch., 12 pp. 441--468.

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