A Càdlàg Rough Path Foundation for Robust Finance
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arXiv
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| Hauptverfasser: | , , |
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| Format: | Preprint |
| Veröffentlicht: |
2021
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| _version_ | 1866917557843263488 |
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| author | Allan, Andrew L. Liu, Chong Prömel, David J. |
| author_facet | Allan, Andrew L. Liu, Chong Prömel, David J. |
| contents | Using rough path theory, we provide a pathwise foundation for stochastic Itô integration, which covers most commonly applied trading strategies and mathematical models of financial markets, including those under Knightian uncertainty. To this end, we introduce the so-called Property (RIE) for càdlàg paths, which is shown to imply the existence of a càdlàg rough path and of quadratic variation in the sense of Föllmer. We prove that the corresponding rough integrals exist as limits of left-point Riemann sums along a suitable sequence of partitions. This allows one to treat integrands of non-gradient type, and gives access to the powerful stability estimates of rough path theory. Additionally, we verify that (path-dependent) functionally generated trading strategies and Cover's universal portfolio are admissible integrands, and that Property (RIE) is satisfied by both (Young) semimartingales and typical price paths. |
| format | Preprint |
| id |
arxiv_https___arxiv_org_abs_2109_04225 |
| institution | arXiv |
| publishDate | 2021 |
| record_format | arxiv |
| spellingShingle | A Càdlàg Rough Path Foundation for Robust Finance Allan, Andrew L. Liu, Chong Prömel, David J. Probability Mathematical Finance 91G80, 60L20, 60G44 Using rough path theory, we provide a pathwise foundation for stochastic Itô integration, which covers most commonly applied trading strategies and mathematical models of financial markets, including those under Knightian uncertainty. To this end, we introduce the so-called Property (RIE) for càdlàg paths, which is shown to imply the existence of a càdlàg rough path and of quadratic variation in the sense of Föllmer. We prove that the corresponding rough integrals exist as limits of left-point Riemann sums along a suitable sequence of partitions. This allows one to treat integrands of non-gradient type, and gives access to the powerful stability estimates of rough path theory. Additionally, we verify that (path-dependent) functionally generated trading strategies and Cover's universal portfolio are admissible integrands, and that Property (RIE) is satisfied by both (Young) semimartingales and typical price paths. |
| title | A Càdlàg Rough Path Foundation for Robust Finance |
| topic | Probability Mathematical Finance 91G80, 60L20, 60G44 |
| url | https://arxiv.org/abs/2109.04225 |