Dynamic State Tameness

Jaime Londoño ()

Finance from University Library of Munich, Germany

Abstract: An extension of the idea of state tameness is presented in a dynamic framework. The proposed model for financial markets is rich enough to provide analytical tools that are mostly obtained in models that arise as the solution of SDEs with deterministic coefficients. In the presented model the augmentation by a shadow stock of the price evolution has a Markovian character. As in a previous paper, the results obtained on valuation of European contingent claims and American contingent claims do not require the full range of the volatility matrix. Under some additional continuity conditions, the conceptual framework provided by the model makes it possible to regard the valuation of financial instruments of the European type as a particular case of valuation of instruments of American type. This provides a unifying framework for the problem of valuation of financial instruments.

Keywords: arbitrage; pricing of contingent claims; continuous-time financial markets; tameness; stochastic flows. (search for similar items in EconPapers)
JEL-codes: G12 G13 (search for similar items in EconPapers)
Pages: 19 pages
Date: 2005-09-08, Revised 2005-09-20
New Economics Papers: this item is included in nep-fin
Note: Type of Document - pdf; pages: 19
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Persistent link: https://EconPapers.repec.org/RePEc:wpa:wuwpfi:0509010

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