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Hedging with Derivatives in Incomplete Markets

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Author Info
Charalambos Aliprantis
Donald J. Brown () (Cowles Foundation, Yale University)
Werner, J.

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Abstract

We present necessary and sufficient conditions on the asset span of incomplete derivative markets for insuring marketed portfolios. If the asset span is finite dimensional there exists a polynomial-time algorithm for deciding if every marketed portfolio is insurable, moreover this algorithm computes the minimum cost insurance portfolio. In addition, we extend the Cox-Leland characterization of optimal portfolio insurance in complete derivative markets to asset spans of incomplete derivative markets where every marketed portfolio is insurable.

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File URL: http://cowles.econ.yale.edu/P/cd/d11a/d1126-r.pdf
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Publisher Info
Paper provided by Cowles Foundation, Yale University in its series Cowles Foundation Discussion Papers with number 1126R.

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Length: 13 pages
Date of creation: Jul 1997
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Handle: RePEc:cwl:cwldpp:1126r

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  1. Aliprantis, C. D. & Brown, D. J. & Polyrakis, I. A. & Werner, J., 1996. "Yudin Cones and Inductive Limit Topologies," Working Papers 964, California Institute of Technology, Division of the Humanities and Social Sciences. [Downloadable!]
  2. Cox, John C. & Ross, Stephen A. & Rubinstein, Mark, 1979. "Option pricing: A simplified approach," Journal of Financial Economics, Elsevier, vol. 7(3), pages 229-263, September. [Downloadable!] (restricted)
  3. Henrotte, Philippe, 1996. "Construction of a State Space for Interrelated Securities with an Application to Temporary Equilibrium Theory," Economic Theory, Springer, vol. 8(3), pages 423-59, October.
  4. Brown, Donald J & Ross, Stephen A, 1991. "Spanning, Valuation and Options," Economic Theory, Springer, vol. 1(1), pages 3-12, January.
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  5. Ross, Stephen A, 1976. "Options and Efficiency," The Quarterly Journal of Economics, MIT Press, vol. 90(1), pages 75-89, February. [Downloadable!] (restricted)
  6. Grossman, Sanford J & Vila, Jean-Luc, 1989. "Portfolio Insurance in Complete Markets: A Note," Journal of Business, University of Chicago Press, vol. 62(4), pages 473-76, October. [Downloadable!] (restricted)
    Other versions:
  7. Aliprantis, Charalambos D. & Brown, Donald J., 1983. "Equilibria in markets with a Riesz space of commodities," Journal of Mathematical Economics, Elsevier, vol. 11(2), pages 189-207, April. [Downloadable!] (restricted)
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  8. Philippe Henrotte, 1996. "Construction of a state space for interrelated securities with an application to temporary equilibrium theory (*)," Economic Theory, Springer, vol. 8(3), pages 423-459.
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