A GENERAL METHODOLOGY TO PRICE AND HEDGE DERIVATIVES IN INCOMPLETE MARKETS-Reference-Cited by-同舟云学术

A GENERAL METHODOLOGY TO PRICE AND HEDGE DERIVATIVES IN INCOMPLETE MARKETS

Published:2000-01 Issue:01 Volume:03 Page:1-24
ISSN:0219-0249
Container-title:International Journal of Theoretical and Applied Finance
language:en
Short-container-title:Int. J. Theor. Appl. Finan.

Author:

AURELL ERIK¹,BAVIERA ROBERTO²,HAMMARLID OLA³,SERVA MAURIZIO⁴,VULPIANI ANGELO⁵

Affiliation:

1. Matematiska Institutionen, Stockholms Universitet, S-106 91 Stockholm, Sweden

2. Dipartimento di Fisica, Università dell'Aquila and Istituto Nazionale Fisica della Materia, Via Vetoio, I-67010 Coppito, L'Aquila, Italy

3. Institutionen för Matematisk Statistik och Försäkringsmatematik, Stockholms Universitet, S-106 91 Stockholm, Sweden

4. Dipartimento di Matematica, Università dell'Aquila and Istituto Nazionale Fisica della Materia, Via Vetoio, I-67010 Coppito, L'Aquila, Italy

5. Dipartimento di Fisica, Università di Roma "La Sapienza" and Istituto Nazionale Fisica della Materia, P.le A. Moro 2, I-00185 Roma, Italy

Abstract

We introduce and discuss a general criterion for the derivative pricing in the general situation of incomplete markets, we refer to it as the No Almost Sure Arbitrage Principle. This approach is based on the theory of optimal strategy in repeated multiplicative games originally introduced by Kelly. As particular cases we obtain the Cox–Ross–Rubinstein and Black–Scholes in the complete markets case and the Schweizer and Bouchaud–Sornette as a quadratic approximation of our prescription. Technical and numerical aspects for the practical option pricing, as large deviation theory approximation and Monte Carlo computation are discussed in detail.

Publisher

World Scientific Pub Co Pte Lt

Subject

General Economics, Econometrics and Finance,Finance

Link

https://www.worldscientific.com/doi/pdf/10.1142/S0219024900000024

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