LJKProbability & Statistics Seminar

On Thursday September 29 2011 at 14h00 in Salle 1  Tour IRMA

Seminary of Simone SCOTTI (Université de Paris 7 / LPMA)

Pricing under uncertainty

Summary

We study the effect of parameter uncertainty on a stochastic diffusion model, in particular the impact on the pricing of contingent claims, using methods from the theory of Dirichlet forms. We apply these techniques to hedging procedures in order to compute the sensitivity of SDE trajectories with respect to parameter perturbations. We show that this analysis can justify endogenously the presence of a bidask spread on the option prices. We also prove that if the stochastic differential equation admits a closed form representation then the sensitivities have closed form representations.
The same technique can be applied to a large class of physical and economical problems.
