Unbounded Volatility in the Uncertain Volatililty Model
Institut National de Recherche en Informatique et Automatique (INRIA)
November 15, 2000
We work in the Uncertain Volatility Model setting of Avellaneda, Levy, Paras  and Lyons  (cf. also ). We first look at European options in a market with no interest rate and focus on the
extreme case where the volatility has a lower bound but no upper bound. We show that the smallest riskless selling price of the claim is the Black-Scholes price (at volatility given by the lower bound) of an option with payoff the smallest concave function above the initial payoff. We next extend our results to the case with interest rate.
Number of Pages in PDF File: 32
Keywords: European options, Hamilton-Jacobi-Bellman Equation, Stochastic Control, Superstrategies
JEL Classification: G10, G12, G13working papers series
Date posted: January 30, 2010
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