Attainability of European Path Independent Claims in Incomplete Markets
Abstract
In this paper we consider the question which path-independent claims are attainable through self-financing trading strategies in an incomplete market. For continuous-time stochastic volatility models we show that only affine payoffs can be replicated. We provide a simple proof for this proposition based on the requirement that, for replication, the stock and the claim must be locally perfectly correlated, and based on the partial differential equation that any path-independent claim has to satisfy. Moreover, we show that this result does not carry over to discrete setups.
Keywords
Incomplete markets; Attainability; Stochastic volatility; Superhedging
Cite as
Branger, N., Esser, A., & Schlag, C. (2004). Attainability of European Path Independent Claims in Incomplete Markets. Finance Research Letters, 1(3), 190–195.Details
Publication type
Research article (journal)
Peer reviewed
Yes
Publication status
Published
Year
2004
Journal
Finance Research Letters
Volume
1
Issue
3
Start page
190
End page
195
Language
English
ISSN
1544-6123
DOI
Full text