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Conditional Davis Pricing

Author

Listed:
  • Kasper Larsen

    (Rutgers, The State University of New Jersey)

  • Halil Mete Soner

    (ETH Zürich and Swiss Finance Institute)

  • Gordan Zitkovic

    (University of Texas at Austin)

Abstract

We introduce the notion of a conditional Davis price and study its properties. Our ultimate goal is to use utility theory to price non-replicable contingent claims in the case when the investor's portfolio already contains a non-replicable component. We show that even in the simplest of settings - such as Samuelson's model - conditional Davis prices are typically not unique and form a non-trivial subinterval of the set of all no-arbitrage prices. Our main result characterizes this set and provides simple conditions under which its two endpoints can be effectively computed. We illustrate the theory with several examples.

Suggested Citation

  • Kasper Larsen & Halil Mete Soner & Gordan Zitkovic, 2018. "Conditional Davis Pricing," Swiss Finance Institute Research Paper Series 18-39, Swiss Finance Institute, revised May 2018.
    • Handle: RePEc:chf:rpseri:rp1839
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    File URL: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3175364
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    More about this item

    Keywords

    Incomplete markets; utility-maximization; unspanned endowment; local martingales; linearization; directional derivative;
    All these keywords.

    JEL classification:

    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

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