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-Litzenberger pricing formula is shown to be a direct consequence of the integral representation theorem.
|Date of creation:||Jun 1988|
|Publication status:||Published in Economic Theory (1991), 1(1): 3-12|
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- Avi Bick., 1982. "Comments on the Valuation of Derivative Assets," Research Program in Finance Working Papers 125, University of California at Berkeley.
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