Effective securities in arbitrage-free markets with bid–ask spreads at liquidation: a linear programming characterization

Baccara, Mariagiovanna; Battauz, Anna; Ortu, Fulvio

doi:10.1016/j.jedc.2004.11.003

Cited by 4 publications

(2 citation statements)

References 23 publications

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“…(b) By Part (a), we can replace E byẼ without changing the value of (3). BothẼ and M C are bounded convex sets, so we can change the order of max and min without affecting the value in (3). For each fixed Q ∈ M, the objective function is linear in e, thus its max is achieved on the boundary ofẼ that is for e ∈ E, yielding the second part of the equality.…”

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confidence: 99%

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Calibrated American option pricing by stochastic linear programming

2013

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We propose an approach for computing the arbitrage-free interval for the price of an American option in discrete incomplete market models via linear programming. The main idea is built replicating strategies that use both the basic asset and some European derivatives available on the market for trading. This method goes under the name of calibrated option pricing and it has given significant results for European options. Here, we extend the analysis to American options showing that the arbitrage-free interval can be characterized in terms of martingale measures and that it gets significantly reduced with respect to the non-calibrated case. © 2013 © 2013 Taylor & Francis

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Section: Downloaded By [Bilkent University] At 06:11 14 July 2014mentioning

confidence: 99%

“…In this work, we apply a linear programming method to price American options in a discrete and incomplete market model. The linear programming theory has been used in contexts of completeness by Naik [1], Ortu [2] and by Baccara et al [3]. As it is well known, we are no longer able to exhibit a unique price for derivatives.…”

Section: Introductionmentioning

confidence: 99%