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Market clearing and derivative pricing

Author

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  • Robert Anderson
  • Roberto Raimondo

Abstract

We develop a method of assigning unique prices to derivative securities, including options, in the continuous-time finance model developed in Raimondo (2001). In contrast with the martingale method of valuing options, which cannot distinguish among infinitely many possible option pricing processes for a given underlying securities price process when markets are dynamically incomplete, our option prices are uniquely determined in equilibrium in closed form as a function of the underlying economic data. Copyright Springer-Verlag Berlin/Heidelberg 2005

Suggested Citation

  • Robert Anderson & Roberto Raimondo, 2005. "Market clearing and derivative pricing," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 25(1), pages 21-34, January.
    • Handle: RePEc:spr:joecth:v:25:y:2005:i:1:p:21-34
    DOI: 10.1007/s00199-004-0468-6
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    Citations

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    Cited by:

    1. Calvet, Laurent E. & Fisher, Adlai J., 2008. "Multifrequency jump-diffusions: An equilibrium approach," Journal of Mathematical Economics, Elsevier, vol. 44(2), pages 207-226, January.
    2. Theodoros Diasakos, 2008. "Comparative Statics of Asset Prices," Carlo Alberto Notebooks 72, Collegio Carlo Alberto, revised 2011.
    3. Frederik Herzberg, 2013. "First steps towards an equilibrium theory for Lévy financial markets," Annals of Finance, Springer, vol. 9(3), pages 543-572, August.
    4. Theodoros M. Diasakos, 2011. "A Simple Characterization of Dynamic Completeness in Continuous Time," Carlo Alberto Notebooks 211, Collegio Carlo Alberto.
    5. James Mirrlees & Roberto Raimondo, 2013. "Strategies in the principal-agent model," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 53(3), pages 605-656, August.
    6. Theodoros M. Diasakos, 2011. "A Simple Characterization of Dynamic Completeness in Continuous Time," Carlo Alberto Notebooks 211, Collegio Carlo Alberto.
    7. Herzberg, Frederik, 2011. "On the foundations of Lévy finance. Equilibrium for a single-agent financial market with jumps," Center for Mathematical Economics Working Papers 406, Center for Mathematical Economics, Bielefeld University.
    8. Diasakos, Theodoros M, 2013. "Comparative Statics of Asset Prices: the effect of other assets' risk," SIRE Discussion Papers 2013-94, Scottish Institute for Research in Economics (SIRE).
    9. Anderson, Robert M. & Raimondo, Roberto C., 2007. "Equilibrium in Continuous-Time Financial Markets: Endogenously Dynamically Complete Markets," Department of Economics, Working Paper Series qt0zq6v5gd, Department of Economics, Institute for Business and Economic Research, UC Berkeley.

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