Open AccessAsymptotic synthesis of contingent claims with controlled risk in a sequence of discrete‐time markets
Author(s) -
Kreps David M.,
Schachermayer Walter
Publication year - 2021
Publication title -
theoretical economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 4.404
H-Index - 32
eISSN - 1555-7561
pISSN - 1933-6837
DOI - 10.3982/te4034
Subject(s) - discrete time and continuous time , sequence (biology) , limit (mathematics) , mathematical economics , zero (linguistics) , bounded function , financial market , incomplete markets , mathematics , limit of a sequence , discrete time stochastic process , connection (principal bundle) , economics , mathematical optimization , finance , microeconomics , statistics , mathematical analysis , linguistics , genetics , philosophy , geometry , stochastic differential equation , continuous time stochastic process , biology
We examine the connection between discrete‐time models of financial markets and the celebrated Black–Scholes–Merton (BSM) continuous‐time model in which “markets are complete.” Suppose that (a) the probability law of a sequence of discrete‐time models converges to the law of the BSM model and (b) the largest possible one‐period step in the discrete‐time models converges to zero. We prove that, under these assumptions, every bounded and continuous contingent claim can be asymptotically synthesized, controlling for the risks taken in a manner that implies, for instance, that an expected‐utility‐maximizing consumer can asymptotically obtain as much utility in the (possibly incomplete) discrete‐time economies as she can at the continuous‐time limit. Hence, in economically significant ways, many discrete‐time models with frequent trading resemble the complete‐markets model of BSM.