IDEAS home Printed from https://ideas.repec.org/a/wsi/ijtafx/v03y2000i01ns0219024900000024.html
   My bibliography  Save this article

A General Methodology To Price And Hedge Derivatives In Incomplete Markets

Author

Listed:
  • ERIK AURELL

    (Matematiska Institutionen, Stockholms Universitet, S-106 91 Stockholm, Sweden)

  • ROBERTO BAVIERA

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

  • OLA HAMMARLID

    (Institutionen för Matematisk Statistik och Försäkringsmatematik, Stockholms Universitet, S-106 91 Stockholm, Sweden)

  • MAURIZIO SERVA

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

  • ANGELO VULPIANI

    (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.

Suggested Citation

  • Erik Aurell & Roberto Baviera & Ola Hammarlid & Maurizio Serva & Angelo Vulpiani, 2000. "A General Methodology To Price And Hedge Derivatives In Incomplete Markets," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 3(01), pages 1-24.
    • Handle: RePEc:wsi:ijtafx:v:03:y:2000:i:01:n:s0219024900000024
    DOI: 10.1142/S0219024900000024
    as

    Download full text from publisher

    File URL: http://www.worldscientific.com/doi/abs/10.1142/S0219024900000024
    Download Restriction: Access to full text is restricted to subscribers
    File URL: https://libkey.io/10.1142/S0219024900000024?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Pengyu Wei & Zuo Quan Xu, 2021. "Dynamic growth-optimum portfolio choice under risk control," Papers 2112.14451, arXiv.org.
    2. Michael A. H. Dempster & Igor V. Evstigneev & Klaus R. Schenk-hoppe, 2007. "Volatility-induced financial growth," Quantitative Finance, Taylor & Francis Journals, vol. 7(2), pages 151-160.
    3. Aurell, Erik & Baviera, Roberto & Hammarlid, Ola & Serva, Maurizio & Vulpiani, Angelo, 2000. "Growth optimal investment and pricing of derivatives," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 280(3), pages 505-521.
    4. Jing Peng & Pengyu Wei & Zuo Quan Xu, 2022. "Relative growth rate optimization under behavioral criterion," Papers 2211.05402, arXiv.org.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:wsi:ijtafx:v:03:y:2000:i:01:n:s0219024900000024. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no bibliographic references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Tai Tone Lim (email available below). General contact details of provider: http://www.worldscinet.com/ijtaf/ijtaf.shtml .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.