IDEAS home Printed from https://ideas.repec.org/a/spr/finsto/v6y2002i1p115-140.html
   My bibliography  Save this article

Derivative pricing based on local utility maximization

Author

Listed:
  • Jan Kallsen

    () (Institut für Mathematische Stochastik, Universität Freiburg, Eckerstraße 1, 79104 Freiburg i. Br., Germany Manuscript)

Abstract

This paper discusses a new approach to contingent claim valuation in general incomplete market models. We determine the neutral derivative price which occurs if investors maximize their local utility and if derivative demand and supply are balanced. We also introduce the sensitivity process of a contingent claim. This process quantifies the reliability of the neutral derivative price and it can be used to construct price bounds. Moreover, it allows to calibrate market models in order to be consistent with initially observed derivative quotations.

Suggested Citation

  • Jan Kallsen, 2002. "Derivative pricing based on local utility maximization," Finance and Stochastics, Springer, vol. 6(1), pages 115-140.
  • Handle: RePEc:spr:finsto:v:6:y:2002:i:1:p:115-140
    Note: received: October 2000; final version received: February 2001
    as

    Download full text from publisher

    File URL: http://link.springer.de/link/service/journals/00780/papers/2006001/20060115.pdf
    Download Restriction: Access to the full text of the articles in this series is restricted

    As the access to this document is restricted, you may want to search for a different version of it.

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. repec:spr:finsto:v:22:y:2018:i:2:d:10.1007_s00780-018-0356-8 is not listed on IDEAS
    2. Ibrahim Ekren & Johannes Muhle-Karbe, 2017. "Portfolio Choice with Small Temporary and Transient Price Impact," Papers 1705.00672, arXiv.org, revised Mar 2018.
    3. Ibrahim Ekren & Ren Liu & Johannes Muhle-Karbe, 2015. "Optimal Rebalancing Frequencies for Multidimensional Portfolios," Papers 1510.05097, arXiv.org, revised Sep 2017.
    4. Mark Owen & Gordan Zitkovic, 2007. "Optimal Investment with an Unbounded Random Endowment and Utility-Based Pricing," Papers 0706.0478, arXiv.org, revised Sep 2007.
    5. Mark P. Owen & Gordan Žitković, 2009. "Optimal Investment With An Unbounded Random Endowment And Utility-Based Pricing," Mathematical Finance, Wiley Blackwell, vol. 19(1), pages 129-159.
    6. Christoph Czichowsky, 2013. "Time-consistent mean-variance portfolio selection in discrete and continuous time," Finance and Stochastics, Springer, vol. 17(2), pages 227-271, April.
    7. Aleš Černý, 2003. "Generalised Sharpe Ratios and Asset Pricing in Incomplete Markets," Review of Finance, European Finance Association, vol. 7(2), pages 191-233.
    8. Kallsen Jan & Rheinländer Thorsten, 2011. "Asymptotic utility-based pricing and hedging for exponential utility," Statistics & Risk Modeling, De Gruyter, vol. 28(1), pages 17-36, March.

    More about this item

    Keywords

    Option pricing; Incomplete markets; Local utility; Neutral derivative price; Sensitivity process; Local sensitivity;

    JEL classification:

    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • D52 - Microeconomics - - General Equilibrium and Disequilibrium - - - Incomplete Markets
    • D58 - Microeconomics - - General Equilibrium and Disequilibrium - - - Computable and Other Applied General Equilibrium Models

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:spr:finsto:v:6:y:2002:i:1:p:115-140. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Sonal Shukla) or (Rebekah McClure). General contact details of provider: http://www.springer.com .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.