We develop a method of assigning unique prices to derivative securities, including options, in the continuous-time finance model developed in Raimondo [47]. In contrast with the martingale method of valuing options, which cannot distinguish among infinitely many possible option pricing processes for a given underlying securities price process when markets are dynamically incomplete, our option prices are uniquely determined in equilibrium in closed form as a function of the underlying economic data.
Raimondo, R., Anderson, R. (2006). Equilibrium Pricing of Derivative Securities in Dynamically Incomplete Markets. In K. Vind (a cura di), Institutions, Equilibria and Efficiency: Essays in Honor of Birgit Grodal (pp. 27-48). Springer.
Equilibrium Pricing of Derivative Securities in Dynamically Incomplete Markets
RAIMONDO, ROBERTO;
2006
Abstract
We develop a method of assigning unique prices to derivative securities, including options, in the continuous-time finance model developed in Raimondo [47]. In contrast with the martingale method of valuing options, which cannot distinguish among infinitely many possible option pricing processes for a given underlying securities price process when markets are dynamically incomplete, our option prices are uniquely determined in equilibrium in closed form as a function of the underlying economic data.
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