Conditional Davis Pricing

Kasper Larsen, Halil Mete Soner and Gordan Zitkovic
Additional contact information
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

No 18-39, Swiss Finance Institute Research Paper Series from Swiss Finance Institute

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.

Keywords: Incomplete markets; utility-maximization; unspanned endowment; local martingales; linearization; directional derivative (search for similar items in EconPapers)
JEL-codes: C61 G11 (search for similar items in EconPapers)
Pages: 27 pages
Date: 2018-05, Revised 2018-05
New Economics Papers: this item is included in nep-upt
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Persistent link: https://EconPapers.repec.org/RePEc:chf:rpseri:rp1839

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