The Annals of Applied Probability

A theoretical framework for the pricing of contingent claims in the presence of model uncertainty

Laurent Denis and Claude Martini

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The aim of this work is to evaluate the cheapest superreplication price of a general (possibly path-dependent) European contingent claim in a context where the model is uncertain. This setting is a generalization of the uncertain volatility model (UVM) introduced in by Avellaneda, Levy and Paras. The uncertainty is specified by a family of martingale probability measures which may not be dominated. We obtain a partial characterization result and a full characterization which extends Avellaneda, Levy and Paras results in the UVM case.

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Ann. Appl. Probab., Volume 16, Number 2 (2006), 827-852.

First available in Project Euclid: 29 June 2006

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Zentralblatt MATH identifier

Primary: 60H05: Stochastic integrals 60G44: Martingales with continuous parameter
Secondary: 31C15: Potentials and capacities

Superreplication capacity uncertain volatility model nondominated model stochastic integral option pricing


Denis, Laurent; Martini, Claude. A theoretical framework for the pricing of contingent claims in the presence of model uncertainty. Ann. Appl. Probab. 16 (2006), no. 2, 827--852. doi:10.1214/105051606000000169.

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