Derivative pricing based on local utility maximization
AbstractThis paper discusses a new approach to contingent claim valuation in general incomplete market models. We determine the neutral derivative price which occurs if investors maximize their local utility and if derivative demand and supply are balanced. We also introduce the sensitivity process of a contingent claim. This process quantifies the reliability of the neutral derivative price and it can be used to construct price bounds. Moreover, it allows to calibrate market models in order to be consistent with initially observed derivative quotations.
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Bibliographic InfoArticle provided by Springer in its journal Finance and Stochastics.
Volume (Year): 6 (2002)
Issue (Month): 1 ()
Note: received: October 2000; final version received: February 2001
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Web page: http://www.springerlink.com/content/101164/
Find related papers by JEL classification:
- G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
- D52 - Microeconomics - - General Equilibrium and Disequilibrium - - - Incomplete Markets
- D58 - Microeconomics - - General Equilibrium and Disequilibrium - - - Computable and Other Applied General Equilibrium Models
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- Christoph Czichowsky, 2013. "Time-consistent mean-variance portfolio selection in discrete and continuous time," Finance and Stochastics, Springer, vol. 17(2), pages 227-271, April.
- Mark Owen & Gordan Zitkovic, 2007. "Optimal Investment with an Unbounded Random Endowment and Utility-Based Pricing," Papers 0706.0478, arXiv.org, revised Sep 2007.
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