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Stochastic Monotonicity and Duality of kth Order with Application to Put-Call Symmetry of Powered Options

Published online by Cambridge University Press:  30 January 2018

Vassili N. Kolokoltsov
Affiliation:
The University of Warwick
Corresponding
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Abstract

We introduce a notion of kth order stochastic monotonicity and duality that allows us to unify the notion used in insurance mathematics (sometimes refereed to as Siegmund's duality) for the study of ruin probability and the duality responsible for the so-called put-call symmetries in option pricing. Our general kth order duality can be interpreted financially as put-call symmetry for powered options. The main objective of this paper is to develop an effective analytic approach to the analysis of duality that will lead to the full characterization of kth order duality of Markov processes in terms of their generators, which is new even for the well-studied case of put-call symmetries.

Type
Research Article
Copyright
© Applied Probability Trust 

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