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Sublinear and Locally Sublinear Prices
 Alessandro Plasmati
Università Commerciale “L. Bocconi”Master of Science in
Finance
Relatore: Prof. Erio Castagnoli
 July, 2008
 Alessandro Plasmati
Sublinear and Locally Sublinear Prices
1/16
 
Table of Contents
.
1
Setting
.
2
Linear Prices - No Arbitrage
.
3
From Linear Prices to Sublinear Prices
.
4
Sublinear PricesNo Arbitrage and Super-replicationsFrictions on the Riskless Asset
.
5
Locally Sublinear PricesSublinear Price IncrementsSuper-replicationsRestricting
L
to
L
+
The Pricing Functional with Multiple Price ChangesDeriving and Interpreting
c
ϕ
.
6
Conclusions
 Alessandro Plasmati
Sublinear and Locally Sublinear Prices
2/16
 
Setting
One Period Discrete Time Model
•
Ω =
{
ω
1
,ω
2
,...,ω
i 
,...,ω
m
}
is the set of states of the world
•
The
n 
financial assets
y
1
,
y
2
,...,
y
 j 
,...,
y
n
are traded on themarket
•
y 
ij 
represents the payoff of asset
j 
if state
i 
occurs
•
Y 
=
y 
ij 
is the
m 
×
n 
matrix collecting all the
y 
ij 
’s
•
A vector
a
∈
R
n
will represent the number of units bought orsold for each of the
n 
assets
•
π
is the row vector containing the prices of the traded securities,i.e.
π
= [
π
(
y
1
)
,π
(
y
2
)
,...,π
(
y
 j 
)
,...,π
(
y
n
)]
 Alessandro Plasmati
Sublinear and Locally Sublinear Prices
3/16
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