A theoretical framework for the pricing of contingent claims in the presence of model uncertainty

Laurent Denis; Claude Martini

doi:10.1214/105051606000000169

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A theoretical framework for the pricing of contingent claims in the presence of model uncertainty

Laurent Denis·Claude Martini

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Abstract

The aim of this work is to evaluate the cheapest superreplication price of a general (possibly path-dependent) European contingent claim in a context where the model is uncertain. This setting is a generalization of the uncertain volatility model (UVM) introduced in by Avellaneda, Levy and Paras. The uncertainty is specified by a family of martingale probability measures which may not be dominated. We obtain a partial characterization result and a full characterization which extends Avellaneda, Levy and Paras results in the UVM case.

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Laurent Denis, Claude Martini. 2006-07-05. A theoretical framework for the pricing of contingent claims in the presence of model uncertainty. https://doi.org/10.1214/105051606000000169

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