arXiv research

We study strict local martingales via h-transforms, a method which first appeared in Delbaen-Schachermayer. We show that strict local martingales arise whenever there is a consistent family of change of measures where the two measures are not equivalent to one another. Several old and new strict local martingales are i…

Study on implied volatility in strict local martingale models, showing how to detect price bubbles.

A strict local martingale is a local martingale which is not a martingale. There are few explicit examples of "naturally occurring" strict local martingales with jumps available in the literature. The purpose of this paper is to provide such examples, and to illustrate how they might arise via filtration shrinkage, a p…

Investors with high risk aversion always invest during financial bubbles.

Study shows conditions for local martingales in SDEs with stochastic volatility.

We present simple new examples of pure-jump strict local martingales. The examples are constructed as exponentials of self-exciting affine Markov processes. We characterize the strict local martingale property of these processes by an integral criterion and by non-uniqueness of an associated ordinary differential equat…

Unique solutions found for diffusive martingale problems.

New boundary condition for Black-Scholes equations in strict local martingale models.

Defines speculative bubbles in discrete-time models based on discounted stock price losing mass.

The paper studies projections of asset prices under equivalent martingale measures.

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].

The study examines how market completeness is lost when filtering down the information set.

Strict local martingales may admit arbitrage opportunities with respect to the class of simple trading strategies. (Since there is no possibility of using doubling strategies in this framework, the losses are not assumed to be bounded from below.) We show that for a class of non-negative strict local martingales, the s…

We study a novel pricing operator for complete, local martingale models. The new pricing operator guarantees put-call parity to hold for model prices and the value of a forward contract to match the buy-and-hold strategy, even if the underlying follows strict local martingale dynamics. More precisely, we discuss a chan…

When the underlying stock price is a strict local martingale process under an equivalent local martingale measure, Black-Scholes PDE associated with an European option may have multiple solutions. In this paper, we study an approximation for the smallest hedging price of such an European option. Our results show that a…

Derives conditions for no arbitrage in financial markets with stochastic or diffusion models.

Develops a model for cryptocurrency interest rates.

We analyze the valuation partial differential equation for European contingent claims in a general framework of stochastic volatility models where the diffusion coefficients may grow faster than linearly and degenerate on the boundaries of the state space. We allow for various types of model behavior: the volatility pr…

In a Markovian model for a financial market, we characterize the best arbitrage with respect to the market portfolio that can be achieved using nonanticipative investment strategies, in terms of the smallest positive solution to a parabolic partial differential inequality; this is determined entirely on the basis of th…

We consider the pricing of derivatives in a setting with trading restrictions, but without any probabilistic assumptions on the underlying model, in discrete and continuous time. In particular, we assume that European put or call options are traded at certain maturities, and the forward price implied by these option pr…

New method finds closest martingale to Brownian motion.

The paper studies martingales and super-martingales under a convex set of measures.

No universal trading strategy exists due to mathematical impossibilities.

The paper uses deep learning to detect asset price bubbles in tech stocks.

Study shows no equivalent martingale measure in jump-diffusion models.

Unified model connects rational and local martingale bubbles to equity risk premium.

Let $\mathbb{F}\subset \mathbb{G}$ be two filtrations and $S$ be a $\mathbb{F}$ semimartingale possessing a $\mathbb{F}$ local martingale deflator. Consider $τ$ a $\mathbb{G}$ stopping time. We study the problem whether $S^{τ-}$ or $S^τ$ can have $\mathbb{G}$ local martingale deflators. A suitable theoretical framework…

The stochastic exponential $Z_t=\exp\{M_t-M_0-(1/2) <M,M>_t\}$ of a continuous local martingale $M$ is itself a continuous local martingale. We give a necessary and sufficient condition for the process $Z$ to be a true martingale in the case where $M_t=\int_0^t b(Y_u)\,dW_u$ and $Y$ is a one-dimensional diffusion drive…

The paper studies incomplete financial markets and risk assets.

Proximal methods avoid local minima in weakly convex problems.

We prove that, for locally bounded processes, absence of arbitrage opportunities of the first kind is equivalent to the existence of a dominating local martingale measure. This is related to and motivated by results from the theory of filtration enlargements.

Proves existence of equivalent martingales close to sticky processes.

We consider a Poisson process $η$ on a measurable space $(\BY,\mathcal{Y})$ equipped with a partial ordering, assumed to be strict almost everwhwere with respect to the intensity measure $λ$ of $η$. We give a Clark-Ocone type formula providing an explicit representation of square integrable martingales (defined with re…

Paper investigates existence of deflators in financial markets.

We present an elementary treatment of the Optional Decomposition Theorem for continuous semimartingales and general filtrations. This treatment does not assume the existence of equivalent local martingale measure(s), only that of strictly positive local martingale deflator(s).

We build a concrete and natural model for the strict 2-category of orbifolds. In particular we prove that if one localizes the 2-category of proper etale Lie groupoids at a class of 1-arrows that we call "covers", then the strict 2-category structure drops down to the localization. In our construction the spaces of 1- …

A constrained informationally efficient market is defined to be one whose price process arises as the outcome of some equilibrium where agents face restrictions on trade. This paper investigates the case of short sale constraints, a setting which despite its simplicity, generates new insights. In particular, it is show…

Study BSDEs with default jump, proving properties and pricing claims.

The paper measures non-convexity of real algebraic curves near a strict local minimum.

The Noether theorem is extended to stochastic control problems using contact symmetries.

We establish the existence and characterization of a primal and a dual facelift - discontinuity of the value function at the terminal time - for utility-maximization in incomplete semimartingale-driven financial markets. Unlike in the lower- and upper-hedging problems, and somewhat unexpectedly, a facelift turns out to…

Derive derivatives of Feynman-Kac semigroups on Riemannian manifolds.

Study on compact toric locally conformally Kähler manifolds, finding specific properties.

The paper describes how martingales can be represented after a random time in financial models.

The paper studies strict equivalence in multi-virtual linkoids with new invariants.

New proof shows local wealth condensation in economic models with biases.

Develops a numerical method for LRM strategies in BNS models with infinite active jumps.

Researchers develop a new method to value securities with uncertain default or death times.