Date: Thursday, March 21, 2013
Location: 1360 East Hall (3:00 PM to 4:00 PM)
Title: Dynamic Conic Finance
Abstract: We develop a framework for narrowing the theoretical spread between ask prices and bid prices of derivative securities in models of discrete time markets with transaction costs using dynamic coherent acceptability indices studied in Bielecki, Cialenco, and Zhang (2010). Aside from the use of acceptability indices as a tool, our approach is very much rooted in the literature studying good deal bounds as a vehicle to narrow the no-arbitrage interval. We first formulate and prove a no-good-deal version of the fundamental theorem of asset pricing (FTAP) using a family of dynamic coherent risk measures. The obtained results generalize to dynamic market model set-up the version of FTAP proved in Cherny and Madan (2010) in the static conic finance framework. We use the market model setup suitable for dividend-paying securities in markets with transaction costs. Finally, we discuss some applications of this theory to path dependent options and compute the good-deal ask and bid prices generated by dynamic gain-loss ratio (a particular dynamic acceptability index).
1573_IgorCialenco_UofMichigan_march2013.pdf
Speaker: Igor Cialenco
Institution: Department of Applied Mathematics, Illinois Institute of Technology
Event Organizer: Erhan Bayraktar erhan@umich.edu
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