Gain-loss pricing under ambiguity of measure

Department of Industrial Engineering, Bilkent University, 06800 Ankara, Turkey. mustafap@bilkent.edu.tr

Received: 24 October 2007
Revised: 9 May 2008

Abstract

Motivated by the observation that the gain-loss criterion, while offering economically meaningful prices of contingent claims, is sensitive to the reference measure governing the underlying stock price process (a situation referred to as ambiguity of measure), we propose a gain-loss pricing model robust to shifts in the reference measure. Using a dual representation property of polyhedral risk measures we obtain a one-step, gain-loss criterion based theorem of asset pricing under ambiguity of measure, and illustrate its use.