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Comparison of Option Prices in Semimartingale Models

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Abstract

In this paper we generalize the recent comparison results of El Karoui et al. (Math Finance 8:93–126, 1998), Bellamy and Jeanblanc (Finance Stoch 4:209–222, 2000) and Gushchin and Mordecki (Proc Steklov Inst Math 237:73–113, 2002) to d-dimensional exponential semimartingales. Our main result gives sufficient conditions for the comparison of European options with respect to martingale pricing measures. The comparison is with respect to convex and also with respect to directionally convex functions. Sufficient conditions for these orderings are formulated in terms of the predictable characteristics of the stochastic logarithm of the stock price processes. As examples we discuss the comparison of exponential semimartingales to multivariate diffusion processes, to stochastic volatility models, to Lévy processes, and to diffusions with jumps. We obtain extensions of several recent results on nontrivial price intervals. A crucial property in this approach is the propagation of convexity property. We develop a new approach to establish this property for several further examples of univariate and multivariate processes.

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Authors and Affiliations

  1. Department of Mathematical Stochastics, University of Freiburg, Eckerstr. 1, D-79104, Freiburg, Germany

    Jan Bergenthum & Ludger Rüschendorf

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  1. Jan Bergenthum
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  2. Ludger Rüschendorf
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Correspondence to Ludger Rüschendorf.

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Bergenthum, J., Rüschendorf, L. Comparison of Option Prices in Semimartingale Models. Finance Stochast. 10, 222–249 (2006). https://doi.org/10.1007/s00780-006-0001-9

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