Simulation of failures and their elimination on financial markets with the events flow generated by a binary tree
Abstract
Simulation of failures and their elimination on financial markets with the events flow generated by a binary tree
Incoming article date: 30.10.2013A financial market on a stochastic basis with a filtration generated by the binary tree is considered. A plugin simulating failures on this market is constructed. We mean by a failure the following situation on the financial market: when passing from a time moment to the next one new events arise but discounted price of the fixed type stock does not change. A failure generates the incompleteness of the market (the set of martingale measures of this market is infinite). By modelling of a weak deformation it is possible to reduce the set of martingale measures to a unique measure. Thereby the price of every contingent claim is uniquely determined. This price may be considered as "fair price".
Keywords: Stochastic basis, probability measure, financial market, binary tree, arbitrage free, completeness, weak deformation, martingale measure, plugin.