Superhedging and Dynamic Risk Measures Under Volatility Uncertainty
affiliation not provided to SSRN
Halil Mete Soner
ETH Zürich; Swiss Finance Institute
November 12, 2010
Swiss Finance Institute Research Paper No. 10-52
We consider dynamic sublinear expectations (i.e., time-consistent coherent risk measures) whose scenario sets consist of singular measures corresponding to a general form of volatility uncertainty. We derive a càdlàg nonlinear martingale which is also the value process of a superhedging problem. The superhedging strategy is obtained from a representation similar to the optional decomposition. Furthermore, we prove an optional sampling theorem for the nonlinear martingale and characterize it as the solution of a second order backward SDE. The uniqueness of dynamic extensions of static sublinear expectations is also studied.
Number of Pages in PDF File: 31
Keywords: Volatility Uncertainty, Risk Measure, Time Consistency, Nonlinear Martingale, Superhedging, Replication, Second Order BSDE, G-Expectation AMS 2000 Subject
JEL Classification: D81, G11working papers series
Date posted: January 15, 2011
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