Pricing of Non-redundant Derivatives in a Complete Market
We consider a complete financial market with primitive assets and derivatives on these primitive assets. Nevertheless, the derivative as sets are non-redundant in the market, in the sense that the market is complete, only with their existence. In such a framework, we derive an equilibrium restriction on the admissible prices of derivative assets. The equilibrium condition imposes a well-ordering principle restricting the set of probability measures that qualify as candidate equivalent martingale measures. This restriction is preference free and applies whenever the utility functions belong to the general class of Von-Neuman Morgenstern functions. We provide numerical examples that show the applicability of the restriction for the computation of option prices.
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- Yacine Aït-Sahalia & Andrew W. Lo, .
"Nonparametric Estimation of State-Price Densities Implicit in Financial Asset Prices,"
CRSP working papers
332, Center for Research in Security Prices, Graduate School of Business, University of Chicago.
- Yacine Aït-Sahalia & Andrew W. Lo, 1998. "Nonparametric Estimation of State-Price Densities Implicit in Financial Asset Prices," Journal of Finance, American Finance Association, vol. 53(2), pages 499-547, 04.
- Yacine Ait-Sahalia & Andrew W. Lo, 1995. "Nonparametric Estimation of State-Price Densities Implicit in Financial Asset Prices," NBER Working Papers 5351, National Bureau of Economic Research, Inc.
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- A, Bizid & Elyès Jouini & P, F, Koehl, 1997. "Pricing in Incomplete Markets : An Equilibrium Approach," Working Papers 97-41, Centre de Recherche en Economie et Statistique.
- M. Avellaneda & A. Levy & A. ParAS, 1995. "Pricing and hedging derivative securities in markets with uncertain volatilities," Applied Mathematical Finance, Taylor & Francis Journals, vol. 2(2), pages 73-88.
- Benveniste, L M & Scheinkman, J A, 1979. "On the Differentiability of the Value Function in Dynamic Models of Economics," Econometrica, Econometric Society, vol. 47(3), pages 727-32, May.
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