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Dynamic State Tameness

Author

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  • Jaime Londoño

    (Universidad Nacional de Colombia, Facultad de Ciencias, Departamento de Matemáticas.)

Abstract

An extension of the idea of state tameness is presented in a dynamic framework. The proposed model for financial markets is rich enough to provide analytical tools that are mostly obtained in models that arise as the solution of SDEs with deterministic coefficients. In the presented model the augmentation by a shadow stock of the price evolution has a Markovian character. As in a previous paper, the results obtained on valuation of European contingent claims and American contingent claims do not require the full range of the volatility matrix. Under some additional continuity conditions, the conceptual framework provided by the model makes it possible to regard the valuation of financial instruments of the European type as a particular case of valuation of instruments of American type. This provides a unifying framework for the problem of valuation of financial instruments.

Suggested Citation

  • Jaime Londoño, 2005. "Dynamic State Tameness," Finance 0509010, EconWPA, revised 20 Sep 2005.
  • Handle: RePEc:wpa:wuwpfi:0509010
    Note: Type of Document - pdf; pages: 19
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    File URL: http://econwpa.repec.org/eps/fin/papers/0509/0509010.pdf
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    References listed on IDEAS

    as
    1. Jaime A. Londoño, 2003. "State Tameness: A New Approach for Credit Constrains," Finance 0305001, EconWPA, revised 16 Feb 2004.
    2. Jaime A. Londo~no, 2003. "State Tameness: A New Approach for Credit Constrains," Papers math/0305274, arXiv.org, revised Feb 2004.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

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

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing

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