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Incomplete financial markets and contingent claim pricing in a dual expected utility theory framework

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  • Corradini, M.
  • Gheno, A.

Abstract

This paper investigates the price for contingent claims in a dual expected utility theory framework, the dual price, considering arbitrage-free financial markets. A pricing formula is obtained for contingent claims written on n underlying assets following a general diffusion process. The formula holds in both complete and incomplete markets as well as in constrained markets. An application is also considered assuming a geometric Brownian motion for the underlying assets and the Wang transform as the distortion function.

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Bibliographic Info

Article provided by Elsevier in its journal Insurance: Mathematics and Economics.

Volume (Year): 45 (2009)
Issue (Month): 2 (October)
Pages: 180-187

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Handle: RePEc:eee:insuma:v:45:y:2009:i:2:p:180-187

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Web page: http://www.elsevier.com/locate/inca/505554

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Keywords: Contingent claim pricing Dual expected utility theory Incomplete markets Wang transform;

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  1. Yaari, Menahem E, 1987. "The Dual Theory of Choice under Risk," Econometrica, Econometric Society, Econometric Society, vol. 55(1), pages 95-115, January.
  2. David Schmeidler, 1989. "Subjective Probability and Expected Utility without Additivity," Levine's Working Paper Archive 7662, David K. Levine.
  3. Black, Fischer & Scholes, Myron S, 1973. "The Pricing of Options and Corporate Liabilities," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 81(3), pages 637-54, May-June.
  4. Marc J. Goovaerts & Rob Kaas & Roger J.A. Laeven & Qihe Tang, 2004. "A Comonotonic Image of Independence for Additive Risk Measures," Tinbergen Institute Discussion Papers, Tinbergen Institute 04-030/4, Tinbergen Institute.
  5. Denuit Michel & Dhaene Jan & Goovaerts Marc & Kaas Rob & Laeven Roger, 2006. "Risk measurement with equivalent utility principles," Statistics & Risk Modeling, De Gruyter, De Gruyter, vol. 24(1/2006), pages 25, July.
  6. Goovaerts, Marc J. & Laeven, Roger J.A., 2008. "Actuarial risk measures for financial derivative pricing," Insurance: Mathematics and Economics, Elsevier, Elsevier, vol. 42(2), pages 540-547, April.
  7. Robert C. Merton, 1973. "Theory of Rational Option Pricing," Bell Journal of Economics, The RAND Corporation, The RAND Corporation, vol. 4(1), pages 141-183, Spring.
  8. Mahmoud Hamada & Michael Sherris, 2003. "Contingent claim pricing using probability distortion operators: methods from insurance risk pricing and their relationship to financial theory," Applied Mathematical Finance, Taylor & Francis Journals, Taylor & Francis Journals, vol. 10(1), pages 19-47.
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