European options in a non-linear incomplete market model with default - INRIA - Institut National de Recherche en Informatique et en Automatique Access content directly
Journal Articles SIAM Journal on Financial Mathematics Year : 2020

European options in a non-linear incomplete market model with default

Miryana Grigorova
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Agnès Sulem
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Abstract

This paper studies the superhedging prices and the associated superhedging strategies for European options in a non-linear incomplete market model with default. We present the seller's and the buyer's point of view. The underlying market model consists of a risk-free asset and a risky asset driven by a Brownian motion and a compensated default martingale. The portfolio processes follow non-linear dynamics with a non-linear driver f. By using a dynamic programming approach, we first provide a dual formulation of the seller's (superhedging) price for the European option as the supremum, over a suitable set of equivalent probability measures Q ∈ Q, of the f-evaluation/expectation under Q of the payoff. We also provide a characterization of the seller's (superhedging) price process as the minimal supersolution of a constrained BSDE with default and a characterization in terms of the minimal weak supersolution of a BSDE with default. By a form of symmetry, we derive corresponding results for the buyer. Our results rely on first establishing a non-linear optional and a non-linear predictable decomposition for processes which are $\mathcal{E}^f$-strong supermartingales under Q, for all Q ∈ Q.
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Dates and versions

hal-02025833 , version 1 (19-02-2019)

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Miryana Grigorova, Marie-Claire Quenez, Agnès Sulem. European options in a non-linear incomplete market model with default. SIAM Journal on Financial Mathematics, 2020, 11 (3), pp.849-880. ⟨10.1137/20M1318018⟩. ⟨hal-02025833⟩
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