Related papers: Expectation and Price in Incomplete Markets
As operators acting on the undetermined final settlement of a derivative security, expectation is linear but price is non-linear. When the market of underlying securities is incomplete, non-linearity emerges from the bid-offer around the…
A derivative is a financial security whose value is a function of underlying traded assets and market outcomes. Pricing a financial derivative involves setting up a market model, finding a martingale (``fair game") probability measure for…
A pricing principle is introduced for non-attainable $q$-exponential bounded contingent claims in an incomplete Brownian motion market setting. The buyer evaluates the contingent claim under the ``distorted Radon-Nikodym derivative'' and…
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…
Value adjustment of uncollateralized trades is determined within a risk-neutral pricing framework. When hedging such trades, investors cannot freely trade protection on their own name, thus facing an incomplete market. This fact is…
The general method is proposed for constructing a family of martingale measures for a wide class of evolution of risky assets. The sufficient conditions are formulated for the evolution of risky assets under which the family of equivalent…
Model risk measures consequences of choosing a model in a class of possible alternatives. We find analytical and simulated bounds for payoff functions on classes of plausible alternatives of a given discrete model. We measure the impact of…
The paper develops general, discrete, non-probabilistic market models and minmax price bounds leading to price intervals for European options. The approach provides the trajectory based analogue of martingale-like properties as well as a…
In general it is not clear which kind of information is supposed to be used for calculating the fair value of a contingent claim. Even if the information is specified, it is not guaranteed that the fair value is uniquely determined by the…
We use a continuous version of the standard deviation premium principle for pricing in incomplete equity markets by assuming that the investor issuing an unhedgeable derivative security requires compensation for this risk in the form of a…
We develop two alternate approaches to arbitrage-free, market-complete, option pricing. The first approach requires no riskless asset. We develop the general framework for this approach and illustrate it with two specific examples. The…
Empirical evidence suggests that even the most competitive markets are not strictly efficient. Price histories can be used to predict near future returns with a probability better than random chance. Many markets can be considered as {\it…
This paper studies the pricing and hedging of derivatives in frictionless and competitive, but incomplete jump-diffusion markets. A unique equivalent martingale measure (EMM) is obtained using filtration reduction to a fictitious complete…
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…
With model uncertainty characterized by a convex, possibly non-dominated set of probability measures, the agent minimizes the cost of hedging a path dependent contingent claim with given expected success ratio, in a discrete-time,…
We introduce a criterion how to price derivatives in incomplete markets, based on the theory of growth optimal strategy in repeated multiplicative games. We present reasons why these growth-optimal strategies should be particularly relevant…
This paper studies the topic of cost-efficiency in incomplete markets. A payoff is called cost-efficient if it achieves a given probability distribution at some given investment horizon with a minimum initial budget. Extensive literature…
The question of pricing and hedging a given contingent claim has a unique solution in a complete market framework. When some incompleteness is introduced, the problem becomes however more difficult. Several approaches have been adopted in…
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 study the problem of determination of asset prices in an incomplete market proposing three different but related scenarios. One scenario uses a market game approach whereas the other two are based on risk sharing or regret minimizing…