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Robust replication in H-self-similar Gaussian market models under uncertainty

Author

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  • Gapeev Pavel V.

    (London School of Economics, Department of Mathematics, London WC2A 2AE, Großbritannien)

  • Sottinen Tommi

    (University of Vaasa, Faculty of Technology, Vaasa, Finnland)

  • Valkeila Esko

Abstract

We consider the robust hedging problem in the framework of model uncertainty, where the log-returns of the stock price are Gaussian and H-self-similar with H∈(1/2,1). These assumptions lead to two natural but mutually exclusive hypotheses, both being self-contained to fix the probabilistic model for the stock price. Namely, the investor may assume that either the market is efficient, that is the stock price process is a continuous semimartingale, or that the centred log-returns have stationary distributions. We show that to be able to super-hedge a European contingent claim with a convex payoff robustly, the investor must assume that the markets are efficient. If it turns out that the stationarity hypothesis is true, then the investor can actually super-hedge the option and thereby receive some net profit.

Suggested Citation

  • Gapeev Pavel V. & Sottinen Tommi & Valkeila Esko, 2011. "Robust replication in H-self-similar Gaussian market models under uncertainty," Statistics & Risk Modeling, De Gruyter, vol. 28(1), pages 37-50, March.
    • Handle: RePEc:bpj:strimo:v:28:y:2011:i:1:p:37-50:n:3
    DOI: 10.1524/stnd.2011.1074
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    References listed on IDEAS

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    1. Sottinen Tommi & Valkeila Esko, 2003. "On arbitrage and replication in the fractional Black–Scholes pricing model," Statistics & Risk Modeling, De Gruyter, vol. 21(2), pages 93-108, February.
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    Cited by:

    1. Frank Bosserhoff & Mitja Stadje, 2019. "Robustness of Delta Hedging in a Jump-Diffusion Model," Papers 1910.08946, arXiv.org, revised Apr 2022.
    2. Tommi Sottinen & Lauri Viitasaari, 2018. "Conditional-Mean Hedging Under Transaction Costs In Gaussian Models," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 21(02), pages 1-15, March.
    3. Shokrollahi, Foad & Sottinen, Tommi, 2017. "Hedging in fractional Black–Scholes model with transaction costs," Statistics & Probability Letters, Elsevier, vol. 130(C), pages 85-91.
    4. Foad Shokrollahi & Tommi Sottinen, 2017. "Hedging in fractional Black-Scholes model with transaction costs," Papers 1706.01534, arXiv.org, revised Jul 2017.
    5. Tommi Sottinen & Lauri Viitasaari, 2017. "Conditional-Mean Hedging Under Transaction Costs in Gaussian Models," Papers 1708.03242, arXiv.org.

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