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Valuation Of General Contingent Claims With Short Selling Bans: An Equal-Risk Pricing Approach

Author

Listed:
  • GUIYUAN MA

    (School of Economics and Finance, Xi’an Jiaotong University, Xi’an, China)

  • SONG-PING ZHU

    (School of Mathematics and Applied Statistics, University of Wollongong, NSW 2522, Australia)

  • IVAN GUO

    (School of Mathematics, Monash University, VIC 3800, Australia)

Abstract

This paper studies the valuation of general contingent claims with short selling bans under the equal-risk pricing (ERP) framework proposed in I. Guo & S.-P. Zhu (2017) [Journal of Economic Dynamics and Control 76, 136–151]. In existing literature, analytical pricing formulae were derived in the special case, where the payoff function is monotonic under risk-neutral measures. In this paper, we establish a unified framework for this new pricing approach so that its range of application can be significantly expanded. The results of I. Guo & S.-P. Zhu (2017) [Journal of Economic Dynamics and Control 76, 136–151] are extended to the case of non-monotonic payoffs (such as a butterfly spread option) under risk-neutral measures. We also provide numerical schemes for computing equal-risk prices under other measures such as the original physical measure. Furthermore, we demonstrate how short selling bans can affect the valuation of contingent claims by comparing equal-risk prices with Black–Scholes prices.

Suggested Citation

  • Guiyuan Ma & Song-Ping Zhu & Ivan Guo, 2022. "Valuation Of General Contingent Claims With Short Selling Bans: An Equal-Risk Pricing Approach," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 25(04n05), pages 1-33, June.
    • Handle: RePEc:wsi:ijtafx:v:25:y:2022:i:04n05:n:s0219024922500224
    DOI: 10.1142/S0219024922500224
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