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Pricing Options in Incomplete Equity Markets via the Instantaneous Sharpe Ratio | | Erhan Bayraktar
; Virginia R. Young
; | | Date: |
23 Jan 2007 | | Subject: | Optimization and Control | | Abstract: | We develop a theory for pricing in incomplete equity markets by assuming that the investor issuing an unhedgeable derivative security requires compensation for this risk in the form of a pre-specified instantaneous Sharpe ratio. First, we apply our method to price options on non-traded assets for which there is a traded asset that is correlated to the non-traded asset. Second, we apply our method to price options in the presence of stochastic volatility. We use comparison arguments to demonstrate that the prices in these two examples satisfy a number of desirable properties. | | Source: | arXiv, math/0701650 | | Services: | Forum | Review | PDF | Favorites | |
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