On contingent claims pricing in incomplete markets: A risk sharing approach
Computational Finance
2012-02-22 v3 Optimization and Control
Probability
Trading and Market Microstructure
Abstract
In an incomplete market setting, we consider two financial agents, who wish to price and trade a non-replicable contingent claim. Assuming that the agents are utility maximizers, we propose a transaction price which is a result of the minimization of a convex combination of their utility differences. We call this price the risk sharing price, we prove its existence for a large family of utility functions and we state some of its properties. As an example, we analyze extensively the case where both agents report exponential utility.
Keywords
Cite
@article{arxiv.0809.4781,
title = {On contingent claims pricing in incomplete markets: A risk sharing approach},
author = {Michail Anthropelos and Nikolaos E. Frangos and Stylianos Z. Xanthopoulos and Athanasios N. Yannacopoulos},
journal= {arXiv preprint arXiv:0809.4781},
year = {2012}
}
Comments
This paper has been withdrawn by the author since its revised version includes several modifications