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Incomplete Financial Markets and Contingent Claim Pricing in a dual expected utility theory framework

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  • Massimiliano Corradini
  • Andrea Gheno

Abstract

This paper investigates the price for contingent claims in a dual expected utility theory framework, the dual price, considering arbitrage-free nancial markets. A pricing formula is obtained for contingent claims written on n underlying assets following general Itô processes and without any comonotonicity hypothesis. The formula holds both in complete and incomplete markets and also in constrained markets. An application is also considered assuming geometric Brownian motion for the underlying assets and the Wang transform as distortion function.

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Bibliographic Info

Paper provided by Department of Economics - University Roma Tre in its series Departmental Working Papers of Economics - University 'Roma Tre' with number 0085.

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Length: 23
Date of creation: Jan 2008
Date of revision:
Handle: RePEc:rtr:wpaper:0085

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Keywords: Contingent Claim Pricing; Dual Utility Theory; Wang Transform; Incomplete Markets;

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  1. Yaari, Menahem E, 1987. "The Dual Theory of Choice under Risk," Econometrica, Econometric Society, Econometric Society, vol. 55(1), pages 95-115, January.
  2. Denuit Michel & Dhaene Jan & Goovaerts Marc & Kaas Rob & Laeven Roger, 2006. "Risk measurement with equivalent utility principles," Statistics & Risk Modeling, De Gruyter, De Gruyter, vol. 24(1/2006), pages 25, July.
  3. Mahmoud Hamada & Michael Sherris, 2003. "Contingent claim pricing using probability distortion operators: methods from insurance risk pricing and their relationship to financial theory," Applied Mathematical Finance, Taylor & Francis Journals, Taylor & Francis Journals, vol. 10(1), pages 19-47.
  4. Black, Fischer & Scholes, Myron S, 1973. "The Pricing of Options and Corporate Liabilities," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 81(3), pages 637-54, May-June.
  5. David Schmeidler, 1989. "Subjective Probability and Expected Utility without Additivity," Levine's Working Paper Archive 7662, David K. Levine.
  6. Robert C. Merton, 1973. "Theory of Rational Option Pricing," Bell Journal of Economics, The RAND Corporation, The RAND Corporation, vol. 4(1), pages 141-183, Spring.
  7. Goovaerts, Marc J. & Laeven, Roger J.A., 2008. "Actuarial risk measures for financial derivative pricing," Insurance: Mathematics and Economics, Elsevier, vol. 42(2), pages 540-547, April.
  8. Goovaerts, Marc J. & Kaas, Rob & Laeven, Roger J.A. & Tang, Qihe, 2004. "A comonotonic image of independence for additive risk measures," Insurance: Mathematics and Economics, Elsevier, vol. 35(3), pages 581-594, December.
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