Max-Plus decomposition of supermartingales and convex order. Application to American options and portfolio insurance
El Karoui, Nicole ; Meziou, Asma
Ann. Probab., Tome 36 (2008) no. 1, p. 647-697 / Harvested from Project Euclid
We are concerned with a new type of supermartingale decomposition in the Max-Plus algebra, which essentially consists in expressing any supermartingale of class $(\mathcal{D})$ as a conditional expectation of some running supremum process. As an application, we show how the Max-Plus supermartingale decomposition allows, in particular, to solve the American optimal stopping problem without having to compute the option price. Some illustrative examples based on one-dimensional diffusion processes are then provided. Another interesting application concerns the portfolio insurance. Hence, based on the “Max-Plus martingale,” we solve in the paper an optimization problem whose aim is to find the best martingale dominating a given floor process (on every intermediate date), w.r.t. the convex order on terminal values.
Publié le : 2008-03-15
Classification:  Supermartingale decompositions,  Max-Plus algebra,  running supremum process,  American options,  optimal stopping,  Lévy processes,  convex order,  martingale optimization with constraints,  portfolio insurance,  Azéma–Yor martingales,  60G07,  60G40,  60G51,  16Y60,  60E15,  91B28,  60G44
@article{1204306963,
     author = {El Karoui, Nicole and Meziou, Asma},
     title = {Max-Plus decomposition of supermartingales and convex order. Application to American options and portfolio insurance},
     journal = {Ann. Probab.},
     volume = {36},
     number = {1},
     year = {2008},
     pages = { 647-697},
     language = {en},
     url = {http://dml.mathdoc.fr/item/1204306963}
}
El Karoui, Nicole; Meziou, Asma. Max-Plus decomposition of supermartingales and convex order. Application to American options and portfolio insurance. Ann. Probab., Tome 36 (2008) no. 1, pp.  647-697. http://gdmltest.u-ga.fr/item/1204306963/