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BSDEs with time-delayed generators of a moving average type with applications to non-monotone preferences

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  • {L}ukasz Delong

Abstract

In this paper we consider backward stochastic differential equations with time-delayed generators of a moving average type. The classical framework with linear generators depending on $(Y(t),Z(t))$ is extended and we investigate linear generators depending on $(\frac{1}{t}\int_0^tY(s)ds, \frac{1}{t}\int_0^tZ(s)ds)$. We derive explicit solutions to the corresponding time-delayed BSDEs and we investigate in detail main properties of the solutions. An economic motivation for dealing with the BSDEs with the time-delayed generators of the moving average type is given. We argue that such equations may arise when we face the problem of dynamic modelling of non-monotone preferences. We model a disappointment effect under which the present pay-off is compared with the past expectations and a volatility aversion which causes the present pay-off to be penalized by the past exposures to the volatility risk.

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  • {L}ukasz Delong, 2010. "BSDEs with time-delayed generators of a moving average type with applications to non-monotone preferences," Papers 1008.3722, arXiv.org, revised Jul 2011.
    • Handle: RePEc:arx:papers:1008.3722
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    1. N. El Karoui & S. Peng & M. C. Quenez, 1997. "Backward Stochastic Differential Equations in Finance," Mathematical Finance, Wiley Blackwell, vol. 7(1), pages 1-71, January.
    2. Rosazza Gianin, Emanuela, 2006. "Risk measures via g-expectations," Insurance: Mathematics and Economics, Elsevier, vol. 39(1), pages 19-34, August.
    3. Nicole EL KAROUI & Claudia RAVANELLI, 2008. "Cash Sub-additive Risk Measures and Interest Rate Ambiguity," Swiss Finance Institute Research Paper Series 08-09, Swiss Finance Institute.
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