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State Tameness: A New Approach for Credit Constrains

Author

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  • Jaime A. Londoño

    (Universidad EAFIT)

Abstract

We propose a new definition for tameness within the model of security prices as It\^o processes that is risk-aware. We give a new definition for arbitrage and characterize it. We then prove a theorem that can be seen as an extension of the second fundamental theorem of asset pricing, and a theorem for valuation of contingent claims of the American type. The valuation of European contingent claims and American contingent claims that we obtain does not require the full range of the volatility matrix. The technique used to prove the theorem on valuation of American contingent claims does not depend on the Doob-Meyer decomposition of super-martingales; its proof is constructive and suggest and alternative way to find approximations of stopping times that are close to optimal.

Suggested Citation

  • Jaime A. Londoño, 2003. "State Tameness: A New Approach for Credit Constrains," Finance 0305001, EconWPA, revised 16 Feb 2004.
  • Handle: RePEc:wpa:wuwpfi:0305001 Note: Type of Document - Acrobat PDF; pages: 13 pages, Publihed in Electronic Communications in Probability, 9, (2004), 1-13.
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    File URL: http://econwpa.repec.org/eps/fin/papers/0305/0305001.pdf
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    References listed on IDEAS

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    1. Allen N. Berger & Loretta J. Mester, 1999. "What explains the dramatic changes in cost and profit performance of the U.S. banking industry?," Working Papers 99-1, Federal Reserve Bank of Philadelphia.
    2. Bauer, Paul W., 1990. "Recent developments in the econometric estimation of frontiers," Journal of Econometrics, Elsevier, vol. 46(1-2), pages 39-56.
    3. Aigner, Dennis & Lovell, C. A. Knox & Schmidt, Peter, 1977. "Formulation and estimation of stochastic frontier production function models," Journal of Econometrics, Elsevier, vol. 6(1), pages 21-37, July.
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    Cited by:

    1. Jaime A. Londo~no, 2005. "Dynamic State Tameness," Papers math/0509139, arXiv.org.
    2. Jaime A. Londo~no, 2006. "State Dependent Utility," Papers math/0603316, arXiv.org.
    3. Jaime Londoño, 2005. "Dynamic State Tameness," Finance 0509010, EconWPA, revised 20 Sep 2005.

    More about this item

    Keywords

    arbitrage; pricing of contingent claims; continuous-time financial markets; tameness;

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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