On a generalized optional decomposition theorem

Abstract

First we consider a set of probabilities and denote by , the associated dynamic sublinear expectation, defined by for and a fixed filtration . We prove that for a positive -supermartingale X, there exits an increasing adapted process C such that is a local -martingale. Second we apply such a result to incomplete market under model misspecification, generalizing the results of Kramkov [D.O. Kramkov, Optional decomposition of supermartingales and hedging contingent claims in incomplete security markets, Prob. Theor. Relat. Field. 15 (1996), pp. 459–479] and Riedel [F. Riedel, On optimal stopping under Ambiguity, Econometrica. 77 (2009), pp. 857–908].

Keywords::

• predictable convexity
• robust hedging
• sublinear expectation
• optional decomposition

AMS Subject Classification::

• primary 91B24
• secondary 91B30

Acknowledgements

The author thanks the associate editor and the two referees for their useful comments which improved this work.