We develop a method of assigning unique prices to derivative securities, including options, in the continuous-time finance model developed in Raimondo (2001). 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. © Springer-Verlag 2005.
Raimondo, R., Anderson, R. (2005). Market Clearing and Derivative Pricing. ECONOMIC THEORY, 25(1), 21-34 [10.1007/s00199-004-0468-6].
Market Clearing and Derivative Pricing
RAIMONDO, ROBERTO;
2005
Abstract
We develop a method of assigning unique prices to derivative securities, including options, in the continuous-time finance model developed in Raimondo (2001). 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. © Springer-Verlag 2005.
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