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Contingent Claims and Market Completeness in a Stochastic Volatility Model

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  • Marc Romano
  • Nizar Touzi

Abstract

In an incomplete market framework, contingent claims are of particular interest since they improve the market efficiency. This paper addresses the problem of market completeness when trading in contingent claims is allowed. We extend recent results by Bajeux and Rochet (1996) in a stochastic volatility model to the case where the asset price and its volatility variations are correlated. We also relate the ability of a given contingent claim to complete the market to the convexity of its price function in the current asset price. This allows us to state our results for general contingent claims by examining the convexity of their “admissible arbitrage prices.”

Suggested Citation

  • Marc Romano & Nizar Touzi, 1997. "Contingent Claims and Market Completeness in a Stochastic Volatility Model," Mathematical Finance, Wiley Blackwell, vol. 7(4), pages 399-412, October.
    • Handle: RePEc:bla:mathfi:v:7:y:1997:i:4:p:399-412
    DOI: 10.1111/1467-9965.00038
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