Pricing and hedging in incomplete markets

Carr, P. and Geman, Hélyette and Madan, D. (2001) Pricing and hedging in incomplete markets. Journal of Financial Economics 62 (1), pp. 131-167. ISSN 0304-405X.

Full text not available from this repository.

Official URL: https://doi.org/10.1016/S0304-405X(01)00075-7

Abstract

We present a new approach for positioning, pricing, and hedging in incomplete markets that bridges standard arbitrage pricing and expected utility maximization. Our approach for determining whether an investor should undertake a particular position involves specifying a set of probability measures and associated floors which expected payoffs must exceed in order for the investor to consider the hedged and financed investment to be acceptable. By assuming that the liquid assets are priced so that each portfolio of assets has negative expected return under at least one measure, we derive a counterpart to the first fundamental theorem of asset pricing. We also derive a counterpart to the second fundamental theorem, which leads to unique derivative security pricing and hedging even though markets are incomplete. For products that are not spanned by the liquid assets of the economy, we show how our methodology provides more realistic bid–ask spreads.

Metadata

Item Type:	Article
School:	Birkbeck Faculties and Schools > Faculty of Business and Law > Birkbeck Business School
Depositing User:	Sarah Hall
Date Deposited:	15 Jun 2020 09:35
Last Modified:	02 Aug 2023 18:00
URI:	https://eprints.bbk.ac.uk/id/eprint/32248

Statistics

Archive Staff Only (login required)

Edit/View Item