Expectation and Price in Incomplete Markets
Mathematical Finance
2020-07-01 v1 Pricing of Securities
Abstract
Risk-neutral pricing dictates that the discounted derivative price is a martingale in a measure equivalent to the economic measure. The residual ambiguity for incomplete markets is here resolved by minimising the entropy of the price measure from the economic measure, subject to mark-to-market constraints, following arguments based on the optimisation of portfolio risk. The approach accounts for market and funding convexities and incorporates available price information, interpolating between methodologies based on expectation and replication.
Keywords
Cite
@article{arxiv.2006.16703,
title = {Expectation and Price in Incomplete Markets},
author = {Paul McCloud},
journal= {arXiv preprint arXiv:2006.16703},
year = {2020}
}
Comments
31 pages, 6 figures