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On the implied market price of risk under the stochastic numéraire

Author

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  • Nikolai Dokuchaev

    (Curtin University
    National Research University ITMO)

Abstract

This papers addresses the stock option pricing problem in a continuous time market model where there are two stochastic tradable assets, and one of them is selected as a numéraire. An equivalent martingale measure is not unique for this market, and there are non-replicable claims. Some rational choices of the equivalent martingale measures are suggested and discussed, including implied measures calculated from bond prices constructed as a risk-free investment with deterministic payoff at the terminal time. This leads to possibility to infer a implied market price of risk process from observed historical bond prices.

Suggested Citation

  • Nikolai Dokuchaev, 2018. "On the implied market price of risk under the stochastic numéraire," Annals of Finance, Springer, vol. 14(2), pages 223-251, May.
    • Handle: RePEc:kap:annfin:v:14:y:2018:i:2:d:10.1007_s10436-017-0315-y
    DOI: 10.1007/s10436-017-0315-y
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    References listed on IDEAS

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    Cited by:

    1. Nikolai Dokuchaev, 2019. "A gap between rational annuitization price for producer and price for customer," Journal of Revenue and Pricing Management, Palgrave Macmillan, vol. 18(2), pages 147-154, April.
    2. Nikolai Dokuchaev, 2018. "On a gap between rational annuitization price for producer and price for customer," Papers 1809.08960, arXiv.org.

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    More about this item

    Keywords

    Implied parameters; Market price of risk; Random numéraire; Stochastic bond price; Incomplete market;
    All these keywords.

    JEL classification:

    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing

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