PRICING SECURITIES WITH EXCHANGE-IMPOSED PRICE LIMITS VIA RISK NEUTRAL VALUATION

Arie Harel (), Giora Harpaz () and Jack Clark Francis ()
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Arie Harel: The Zicklin School of Business, Baruch College, The City University of New York, Box B11-220, One Bernard Baruch Way, New York, NY 10010-5585, USA
Giora Harpaz: The Zicklin School of Business, Baruch College, The City University of New York, Box B11-220, One Bernard Baruch Way, New York, NY 10010-5585, USA
Jack Clark Francis: The Zicklin School of Business, Baruch College, The City University of New York, Box B11-220, One Bernard Baruch Way, New York, NY 10010-5585, USA

International Journal of Theoretical and Applied Finance (IJTAF), 2007, vol. 10, issue 03, 399-406

Abstract: Asian and European financial markets impose daily price fluctuation limits on individual securities. In the US several futures exchanges are regulated by price fluctuation limits as well. The price limits in most exchanges are set daily, and they are usually based on a percentage change from the previous day's closing price. We show that the future cash flows of a security subject to price limit regulation resemble that of a distinctive contingent claim. Assuming that the security price follows a lognormal distribution, we use the risk-neutral valuation relation (RNVR) developed by [4] to derive the security valuation, in the presence of price fluctuation limits. The characteristics of the pricing formula are examined analytically and numerically.

Keywords: Contingent claims; price limits; risk neutral valuation; security pricing (search for similar items in EconPapers)
Date: 2007
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Citations: View citations in EconPapers (1)

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DOI: 10.1142/S021902490700424X

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