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The no-arbitrage pricing of non-traded assets

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  • Robert A. Jarrow

    (Cornell University)

Abstract

This paper shows how to uniquely price non-traded assets using no-arbitrage in an otherwise frictionless market setting. The approach requires the assumption that the hedging error, properly defined, is non-priced or idiosyncratic risk. This methodology can be applied to private loans, illiquid publicly traded debt, insurance contacts, private equity, real estate, and real options.

Suggested Citation

  • Robert A. Jarrow, 2023. "The no-arbitrage pricing of non-traded assets," Annals of Finance, Springer, vol. 19(3), pages 401-418, September.
    • Handle: RePEc:kap:annfin:v:19:y:2023:i:3:d:10.1007_s10436-023-00434-1
    DOI: 10.1007/s10436-023-00434-1
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    References listed on IDEAS

    as
    1. Robert A. Jarrow & David Lando & Fan Yu, 2008. "Default Risk And Diversification: Theory And Empirical Implications," World Scientific Book Chapters, in: Financial Derivatives Pricing Selected Works of Robert Jarrow, chapter 19, pages 455-480, World Scientific Publishing Co. Pte. Ltd..
    2. Stephen A. Ross, 2013. "The Arbitrage Theory of Capital Asset Pricing," World Scientific Book Chapters, in: Leonard C MacLean & William T Ziemba (ed.), HANDBOOK OF THE FUNDAMENTALS OF FINANCIAL DECISION MAKING Part I, chapter 1, pages 11-30, World Scientific Publishing Co. Pte. Ltd..
    3. Robert A. Jarrow, 2021. "The Economics of Insurance: A Derivatives-Based Approach," Annual Review of Financial Economics, Annual Reviews, vol. 13(1), pages 79-110, November.
    4. Merton, Robert C., 1976. "Option pricing when underlying stock returns are discontinuous," Journal of Financial Economics, Elsevier, vol. 3(1-2), pages 125-144.
    5. Lambrecht, Bart M., 2017. "Real options in finance," Journal of Banking & Finance, Elsevier, vol. 81(C), pages 166-171.
    6. Hull, John C & White, Alan D, 1987. "The Pricing of Options on Assets with Stochastic Volatilities," Journal of Finance, American Finance Association, vol. 42(2), pages 281-300, June.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Arbitrage pricing; Non-traded assets; Idiosyncratic risk; Private debt; Private equity; Insurance contracts; Real estate; Real options;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies

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