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Pricing of non-redundant derivatives in a complete market

Bizid, Abdelhamid; Koehl, Pierre-François; Jouini, Elyès (1998), Pricing of non-redundant derivatives in a complete market, Review of Derivatives Research, 2, 4, p. 287-314. http://dx.doi.org/10.1007/BF01574150

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Type
Article accepté pour publication ou publié
Date
1998
Journal name
Review of Derivatives Research
Volume
2
Number
4
Publisher
Kluwer Academic Publishers
Pages
287-314
Publication identifier
http://dx.doi.org/10.1007/BF01574150
Metadata
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Author(s)
Bizid, Abdelhamid
Koehl, Pierre-François
Jouini, Elyès
Abstract (EN)
We consider a complete financial market with primitive assets and derivatives on these primitive assets. Nevertheless, the derivative assets are non-redundant in the market, in the sense that the market is complete, only with their existence. In such a framework, we derive an equilibrium restriction on the admissible prices of derivative assets. The equilibrium condition imposes a well-ordering principle restricting the set of probability measures that qualify as candidate equivalent martingale measures. This restriction is preference free and applies whenever the utility functions belong to the general class of Von-Neumann Morgenstern functions. We provide numerical examples that show the applicability of the restriction for the computation of option prices.
Subjects / Keywords
derivatives; Incomplete markets; pricing; equilibrium
JEL
G13 - Contingent Pricing; Futures Pricing
C62 - Existence and Stability Conditions of Equilibrium
G12 - Asset Pricing; Trading Volume; Bond Interest Rates
D53 - Financial Markets

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