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Arbitrage and Super-Replication Cost with Convex Constraints

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  • L, Carassus

    (Crest)

  • H, Pham

    (Crest)

  • E, Jouini

    (Crest)

Abstract

In frictionless securities markets, the characterization of the no arbitrage condition by the existence of equivalent martingale measures in discrete time is known as the fundamental Theorem of Asset Pricing. In the presence of convex constraints on the trading strategies, we extend this theorem under a closedness condition and a nondegeneracy assumption. Next, under some additional restrictions, we provide a dual representation of the super-replication cost of a nonnegative L contingent claim, i.e. the minimal initial wealth to hedge it by means of constrained trading strategies.
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Suggested Citation

  • L, Carassus & H, Pham & E, Jouini, 1997. "Arbitrage and Super-Replication Cost with Convex Constraints," Working Papers 97-57, Center for Research in Economics and Statistics.
    • Handle: RePEc:crs:wpaper:97-57
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    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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