Spanning, Valuation and Options
AbstractWe model the space of marketed assets as a Riesz space of commodities. In this setting, two alternative characterizations are given of the space of continuous options on a bounded asset, s, with limited liability. The first characterization represents every continuous option on s as the uniform limit of portfolios of calls on s. The second characterization represents an option as a continuous sum (or integral) of Arrow-Debreu securities, with respect to s. The pricing implications of these representations are explored. In particular, the Breeden-Litzenberger pricing formula is shown to be a direct consequence of the integral representation theorem.
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Bibliographic InfoPaper provided by Cowles Foundation for Research in Economics, Yale University in its series Cowles Foundation Discussion Papers with number 873.
Length: 20 pages
Date of creation: Jun 1988
Date of revision:
Publication status: Published in Economic Theory (1991), 1(1): 3-12
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Postal: Cowles Foundation, Yale University, Box 208281, New Haven, CT 06520-8281 USA
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- C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models
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