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A pricing formula for delayed claims: appreciating the past to value the future

Author

Listed:
  • Enrico Biffis

    (Imperial College London)

  • Beniamin Goldys

    (The University of Sydney)

  • Cecilia Prosdocimi

    (LUISS “Guido Carli”)

  • Margherita Zanella

    (Politecnico di Milano)

Abstract

We consider the valuation of contingent claims with delayed dynamics in a Samuelson complete market model. We find a pricing formula that can be decomposed into terms reflecting the current market values of the past and the future, showing how the valuation of prospective cashflows cannot abstract away from the contribution of the past. As a practical application, we provide an explicit expression for the market value of human capital in a setting with wage rigidity. The formula we derive has successfully been used to explicitly solve the infinite dimensional stochastic control problems addressed in Biffis et al. (SIAM J Control Optim 58(4):1906–1938, 2020), Djeiche et al. (Stoch Process Appl 145:48–85, 2022) and Biagini et al. (SIAM J Financial Math 13(3):1004–1039, 2022).

Suggested Citation

  • Enrico Biffis & Beniamin Goldys & Cecilia Prosdocimi & Margherita Zanella, 2023. "A pricing formula for delayed claims: appreciating the past to value the future," Mathematics and Financial Economics, Springer, volume 17, number 2, June.
    • Handle: RePEc:spr:mathfi:v:17:y:2023:i:2:d:10.1007_s11579-022-00331-7
    DOI: 10.1007/s11579-022-00331-7
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    References listed on IDEAS

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