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Option Prices Sustained by Risk-Preferences

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  • Antonio Camara

    (University of Michigan, Flint)

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    Abstract

    We investigate the preference and distribution restrictions that underlie explicit risk-neutral option valuation equations. We establish new sufficient conditions in terms of utility functions and joint distributions of assets' payoffs and state variables for these models to hold in equilibrium economies where markets are dynamically incomplete. In our models, both the marginal and conditional distributions of wealth play relevant roles in obtaining the pricing kernel implicit in the model. This result shows no straightforward link between the Black-Scholes model and constant proportional risk-aversion preferences. We introduce and investigate many univariate and multivariate option pricing models.

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    Bibliographic Info

    Article provided by University of Chicago Press in its journal Journal of Business.

    Volume (Year): 78 (2005)
    Issue (Month): 5 (September)
    Pages: 1683-1708

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    Handle: RePEc:ucp:jnlbus:v:78:y:2005:i:5:p:1683-1708

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    Web page: http://www.journals.uchicago.edu/JB/

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    Cited by:
    1. Chang, Chuang-Chang & Lin, Jun-Biao, 2010. "The valuation of contingent claims using alternative numerical methods," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 20(5), pages 490-508, December.
    2. Chuang-Chang Chang & Jun-Biao Lin, 2010. "The valuation of multivariate contingent claims under transformed trinomial approaches," Review of Quantitative Finance and Accounting, Springer, vol. 34(1), pages 23-36, January.
    3. Masayuki Ikeda, 2010. "Equilibrium preference free pricing of derivatives under the generalized beta distributions," Review of Derivatives Research, Springer, vol. 13(3), pages 297-332, October.

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