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Market Clearing and Derivative Pricing

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  • Robert M. Anderson

    (University of California, Berkeley)

  • Roberto C. Raimondo

    (University of Melbourne)

Abstract

We develop a method of assigning unique prices to derivative securities, including options, in the continuous-time finance models developed in Raimondo [45] and Anderson and Raimondo [6]. 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 as a function of the underlying economic data and the underlying securities price process; in the single-agent model, this function is given in closed form.

Suggested Citation

  • Robert M. Anderson & Roberto C. Raimondo, 2003. "Market Clearing and Derivative Pricing," Discussion Papers 03-17, University of Copenhagen. Department of Economics.
    • Handle: RePEc:kud:kuiedp:0317
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    References listed on IDEAS

    as
    1. Magill, Michael & Shafer, Wayne, 1991. "Incomplete markets," Handbook of Mathematical Economics, in: W. Hildenbrand & H. Sonnenschein (ed.), Handbook of Mathematical Economics, edition 1, volume 4, chapter 30, pages 1523-1614, Elsevier.
    2. Michael Magill & Martine Quinzii, 2002. "Theory of Incomplete Markets, Volume 1," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262632543, April.
    3. Nielsen, Lars Tyge, 1999. "Pricing and Hedging of Derivative Securities," OUP Catalogue, Oxford University Press, number 9780198776192.
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