Spanning, Valuation and Options
We 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-Littzenberger pricing formula is shown to be a direct consequence of the integral representation theorem.
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Volume (Year): 1 (1991)
Issue (Month): 1 (January)
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- Green, Richard C. & Jarrow, Robert A., 1987. "Spanning and completeness in markets with contingent claims," Journal of Economic Theory, Elsevier, vol. 41(1), pages 202-210, February.
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