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Equilibrium Pricing in Incomplete Markets

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Author Info
Abdelhamid Bizid (CERMSEM - CEntre de Recherche en Mathématiques, Statistique et Économie Mathématique - CNRS : UMR8095 - Université Panthéon-Sorbonne - Paris I)
Elyès Jouini () (CEREMADE - CEntre de REcherches en MAthématiques de la DEcision - CNRS : UMR7534 - Université Paris Dauphine - Paris IX)

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Abstract

Given exogenously the price process of some asets, we constrain the price process of other assets, which are characterised by their final pay-offs. We deal with an incomplete market framework in a discrete time model and assume the existence of the equilibrium. In this setup, we derive restrictions on the state-price deflators and these restrictions do not depend on a particular choice of utility function. A stochastic volatility model is numerically investigated as an example. Our approach leads to an interval of admissible prices much better than the arbitrage pricing interval.

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Paper provided by HAL in its series Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) with number halshs-00176484_v1.

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Date of creation: 01 Dec 2005
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Publication status: Published, Journal of Financial and Quantitative Analysis, 2005, 40, 4, 833-848
Handle: RePEc:hal:cesptp:halshs-00176484_v1

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Keywords: incomplete markets; pricing;

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References listed on IDEAS
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  1. Philip H. Dybvig, 1987. "Inefficient Dynamic Portfolio Strategies or How to Throw Away a Million Dollars in the Stock Market," Cowles Foundation Discussion Papers 826R, Cowles Foundation, Yale University, revised Jan 1988. [Downloadable!]
    Other versions:
  2. Zhou, Chunsheng, 1999. "Informational Asymmetry and Market Imperfections: Another Solution to the Equity Premium Puzzle," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 34(04), pages 445-464, December. [Downloadable!]
  3. Mark Rubinstein, 1976. "The Valuation of Uncertain Income Streams and the Pricing of Options," Bell Journal of Economics, The RAND Corporation, vol. 7(2), pages 407-425, Autumn. [Downloadable!] (restricted)
  4. Detemple, Jerome B & Selden, Larry, 1991. "A General Equilibrium Analysis of Option and Stock Market Interactions," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 32(2), pages 279-303, May. [Downloadable!] (restricted)
  5. Ritchken, Peter H, 1985. " On Option Pricing Bounds," Journal of Finance, American Finance Association, vol. 40(4), pages 1219-33, September. [Downloadable!] (restricted)
  6. Dybvig, Philip H, 1988. "Distributional Analysis of Portfolio Choice," Journal of Business, University of Chicago Press, vol. 61(3), pages 369-93, July. [Downloadable!] (restricted)
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  7. Robert C. Merton, 1973. "Theory of Rational Option Pricing," Bell Journal of Economics, The RAND Corporation, vol. 4(1), pages 141-183, Spring. [Downloadable!] (restricted)
  8. Douglas T. Breeden & Michael R Gibbons & Robert H. Litzenberger, . "Empirical Tests of the Consumption-Oriented CAPM," Rodney L. White Center for Financial Research Working Papers 07-89, Wharton School Rodney L. White Center for Financial Research.
  9. Breeden, Douglas T & Gibbons, Michael R & Litzenberger, Robert H, 1989. " Empirical Tests of the Consumption-Oriented CAPM," Journal of Finance, American Finance Association, vol. 44(2), pages 231-62, June. [Downloadable!] (restricted)
  10. Elyes Jouini & Clotilde Napp, 1999. "Continuous Time Equilibrium Pricing of Nonredundant Assets," New York University, Leonard N. Stern School Finance Department Working Paper Seires 99-008, New York University, Leonard N. Stern School of Business-. [Downloadable!]
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  11. Harrison, J. Michael & Kreps, David M., 1979. "Martingales and arbitrage in multiperiod securities markets," Journal of Economic Theory, Elsevier, vol. 20(3), pages 381-408, June. [Downloadable!] (restricted)
  12. Douglas T. Breeden & Michael R Gibbons & Robert H. Litzenberger, . "Empirical Tests of the Consumption-Oriented CAPM," Rodney L. White Center for Financial Research Working Papers 7-89, Wharton School Rodney L. White Center for Financial Research.
  13. Perrakis, Stylianos, 1986. "Option Bounds in Discrete Time: Extensions and the Pricing of the American Put," Journal of Business, University of Chicago Press, vol. 59(1), pages 119-41, January. [Downloadable!] (restricted)
  14. Black, Fischer & Scholes, Myron S, 1973. "The Pricing of Options and Corporate Liabilities," Journal of Political Economy, University of Chicago Press, vol. 81(3), pages 637-54, May-June. [Downloadable!] (restricted)
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