Seminar Event Detail


Financial/Actuarial Mathematics

Date:  Friday, March 11, 2016
Location:  1866 East Hall (4:00 PM to 5:00 PM)

Title:  Economically consistent valuations and put-call parity

Abstract:   We propose an approach to the valuation of contingent claims in general, symmetric
semimartingale models of financial markets. We start from two simple, economically
motivated axioms, namely absence of arbitrage (in the sense of NUPBR) and absence of relative arbitrage among all buy-and-hold strategies (called static efficiency). We then call a valuation process for a contingent claim economically


consistent if the financial market enlarged by that process still satisfies this combination


of properties. It turns out that this approach lies in the middle between the


extremes of valuing by risk-neutral expectation or by absence of arbitrage alone.


We show that this always yields put-call parity, although put and call values themselves


can be nonunique, even for complete markets. We provide general formulas


for put and call values in complete markets and show that these are symmetric and


that both contain in general three terms. We also show that our approach contains


all the put-call parity respecting valuation formulas in the classic theory as special


cases, and we explain precisely when and how the different terms in the put and


call valuation formulas disappear or simplify.

Joint work with Martin Schweizer.

Files: 3881_Herdegen_Michigan2.pdf


Speaker:  Martin Herdegen
Institution:  ETH

Event Organizer:   Erhan Bayraktar    erhan@umich.edu

 

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