On the relationship of the dynamic programming approach and the contingent claim approach to asset valuation

Mihail Zervos (), Bernhard Meister () and Thomas S. Knudsen ()
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Mihail Zervos: Department of Statistics, School of Mathematics and Statistics, University of Newcastle, Newcastle-upon-Tyne NE1 7RU, UK Manuscript
Bernhard Meister: Goldman Sachs, ARK Mori Bldg., 5F, 12-32, Akasaka 1-chome, Minato-ku, Tokyo 107, Japan
Thomas S. Knudsen: Bankers Trust, 1 Appold Street, Broadgate, London EC2A 2HE, UK

Finance and Stochastics, 1999, vol. 3, issue 4, 433-449

Abstract: We consider a general model for an investment producing a single commodity, and, assuming that there exists a traded asset spanning the corresponding market, we prove a "verification theorem" which relates the solution of an appropriate differential equation with the investment's contingent claim price. In this way, we show in a mathematically rigorous way that the contingent claim approach and the dynamic programming approach to the problem of asset valuation are equivalent, modulo parameter calibration. Our analysis can be used in a straightforward way to address a big number of investment models.

Keywords: Dynamic programming; contingent claims; non-arbitrage; real assets (search for similar items in EconPapers)
JEL-codes: D46 E22 G12 G31 (search for similar items in EconPapers)
Date: 1999-08-20
Note: received: October 1997; final version received: September 1998
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Citations: View citations in EconPapers (7)

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