Pricing of Non-redundant Derivatives in a Complete Market
AbstractWe consider a complete financial market with primitive assets and derivatives on these primitive assets. Nevertheless, the derivative as sets are non-redundant in the market, in the sense that the market is complete, only with their existence. In such a framework, we derive an equilibrium restriction on the admissible prices of derivative assets. The equilibrium condition imposes a well-ordering principle restricting the set of probability measures that qualify as candidate equivalent martingale measures. This restriction is preference free and applies whenever the utility functions belong to the general class of Von-Neuman Morgenstern functions. We provide numerical examples that show the applicability of the restriction for the computation of option prices.
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Bibliographic InfoPaper provided by New York University, Leonard N. Stern School of Business- in its series New York University, Leonard N. Stern School Finance Department Working Paper Seires with number 99-009.
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Other versions of this item:
- A, Bizid & Elyès Jouini & P, F, Koehl, 1997. "Pricing of Non-redundant Derivatives in a Complete Market," Working Papers 97-51, Centre de Recherche en Economie et Statistique.
- G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
- C62 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Existence and Stability Conditions of Equilibrium
- G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
- D53 - Microeconomics - - General Equilibrium and Disequilibrium - - - Financial Markets
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