Abstract
This paper studies the problem of pricing contingent claims in a market which has frictions in the form of costs, such as penalty functions corresponding to constraints. An arbitrage-free interval is identified, and a fair price based upon utility functions is proposed. It provides a framework to study incomplete markets that is simplier than the one related to constraints on portfolios introduced by Karatzas and Kou. © 2000 Blackwell Publisher
| Original language | English |
|---|---|
| Pages (from-to) | 89-108 |
| Journal | Mathematical Finance |
| Volume | 10 |
| Issue number | 2 |
| DOIs | |
| Publication status | Published - Apr 2000 |
| Externally published | Yes |
Research Keywords
- Arbitrage-free interval
- Black-scholes price
- Complete markets
- Contingent claims
- Fair price
- Frictions
- Incomplete markets
- Penalty functions
- Utility function
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