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

Abstract : We study the superhedging prices and the associated superhedging strategies for American options in a non-linear incomplete market model with default. The points of view of the seller and of the buyer are presented. 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. We give a dual representation of the seller's (superhedging) price for the American option associated with a completely irregular payoff $(\xi_t)$ (not necessarily càdlàg) in terms of the value of a non-linear mixed control/stopping problem. The dual representation involves a suitable set of equivalent probability measures, which we call f-martingale probability measures. We also provide two infinitesimal characterizations of the seller's price process: in terms of the minimal supersolution of a constrained reflected BSDE and in terms of the minimal supersolution of an optional reflected BSDE. Under some regularity assumptions on $\xi$, we also show a duality result for the buyer's price in terms of the value of a non-linear control/stopping game problem.
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https://hal.archives-ouvertes.fr/hal-02025835
Contributor : Miryana Grigorova <>
Submitted on : Tuesday, February 19, 2019 - 7:37:20 PM
Last modification on : Friday, April 10, 2020 - 5:13:37 PM
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  • HAL Id : hal-02025835, version 1

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Miryana Grigorova, Marie-Claire Quenez, Agnès Sulem. American options in a non-linear incomplete market model with default. 2019. ⟨hal-02025835⟩

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