Related papers: Pricing and Valuation under the Real-World Measure
In order to find a way of measuring the degree of incompleteness of an incomplete financial market, the rank of the vector price process of the traded assets and the dimension of the associated acceptance set are introduced. We show that…
A market with asymmetric information can be viewed as a repeated exchange game between the informed sector and the uninformed one. In a market with risk-neutral agents, De Meyer [2010] proves that the price process should be a particular…
We discuss a data market technique based on intrinsic (relevance and uniqueness) as well as extrinsic value (influenced by supply and demand) of data. For intrinsic value, we explain how to perform valuation of data in absolute terms (i.e…
We extend the fundamental theorem of asset pricing to a model where the risky stock is subject to proportional transaction costs in the form of bid-ask spreads and the bank account has different interest rates for borrowing and lending. We…
The paper introduces benchmark-neutral pricing and hedging for long-term contingent claims. It employs the growth optimal portfolio of the stocks as numeraire and the new benchmark-neutral pricing measure for pricing. For a realistic…
A supervised machine learning algorithm determines a model from a learning sample that will be used to predict new observations. To this end, it aggregates individual characteristics of the observations of the learning sample. But this…
We prove the Fundamental Theorem of Asset Pricing for a discrete time financial market where trading is subject to proportional transaction cost and the asset price dynamic is modeled by a family of probability measures, possibly…
We introduce a discrete binary tree for pricing contingent claims with the underlying security prices exhibiting history dependence characteristic of that induced by market microstructure phenomena. Example dependencies considered include…
Within the context of traditional life insurance, a model-independent relationship about how the market value of assets is attributed to the best estimate, the value of in-force business and tax is established. This relationship holds true…
Fairness in decision-making processes is often quantified using probabilistic metrics. However, these metrics may not fully capture the real-world consequences of unfairness. In this article, we adopt a utility-based approach to more…
We obtain option pricing formulas for stock price models in which the drift and volatility terms are functionals of a continuous history of the stock prices. That is, the stock dynamics follows a nonlinear stochastic functional differential…
A solution to a portfolio optimization problem is always conditioned by constraints on the initial capital and the price of the available market assets. If a risk neutral measure is known, then the price of each asset is the discounted…
Constant and symmetric price impact functions, most commonly used in agent-based market modelling, are shown to give rise to paradoxical and inconsistent outcomes in the simplest case of arbitrage exploitation when open-hold-close actions…
The value of an asset in a financial market is given in terms of another asset known as numeraire. The dynamics of the value is non-stationary and hence, to quantify the relationships between different assets, one requires convenient…
Our goal here is to discuss the pricing problem of European and American options in discrete time using elementary calculus so as to be an easy reference for first year undergraduate students. Using the binomial model we compute the fair…
Data assets are data commodities that have been processed, produced, priced, and traded based on actual demand. Reasonable pricing mechanism for data assets is essential for developing the data market and realizing their value. Most…
We model an informed agent with information about the future value of an asset trying to maximize profits when subjected to a transaction cost as well as a market maker tasked with setting fair transaction prices. In a single auction model,…
We study the power and limitations of posted prices in multi-unit markets, where agents arrive sequentially in an arbitrary order. We prove upper and lower bounds on the largest fraction of the optimal social welfare that can be guaranteed…
We study the upper hedging price for contingent claims in market models with strong types of arbitrage: increasing profit, strong arbitrage, and arbitrage of the first kind. The existence of arbitrage may make the price smaller than if it…
This paper studies arbitrage pricing theory in financial markets with implicit transaction costs. We extend the existing theory to include the more realistic possibility that the price at which the investors trade is dependent on the traded…