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Equilibrium Pricing of Derivative Securities in Dynamically Incomplete Markets

In: Institutions, Equilibria and Efficiency

Author

Listed:
  • Robert M. Anderson

    (University of California)

  • Roberto C. Raimondo

    (University of Melbourne)

Abstract

Summary We develop a method of assigning unique prices to derivative securities, including options, in the continuous-time finance model developed in Raimondo [47]. 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.

Suggested Citation

  • Robert M. Anderson & Roberto C. Raimondo, 2006. "Equilibrium Pricing of Derivative Securities in Dynamically Incomplete Markets," Studies in Economic Theory, in: Christian Schultz & Karl Vind (ed.), Institutions, Equilibria and Efficiency, chapter 3, pages 27-48, Springer.
    • Handle: RePEc:spr:steccp:978-3-540-28161-0_3
    DOI: 10.1007/3-540-28161-4_3
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    Cited by:

    1. 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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