VALUATION OF GENERAL CONTINGENT CLAIMS WITH SHORT SELLING BANS: AN EQUAL-RISK PRICING APPROACH

Guiyuan Ma, Song-Ping Zhu () and Ivan Guo ()
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Guiyuan Ma: School of Economics and Finance, Xi’an Jiaotong University, Xi’an, China
Song-Ping Zhu: School of Mathematics and Applied Statistics, University of Wollongong, NSW 2522, Australia
Ivan Guo: School of Mathematics, Monash University, VIC 3800, Australia

International Journal of Theoretical and Applied Finance (IJTAF), 2022, vol. 25, issue 04n05, 1-33

Abstract: This paper studies the valuation of general contingent claims with short selling bans under the equal-risk pricing (ERP) framework proposed in I. Guo & S.-P. Zhu (2017) [Journal of Economic Dynamics and Control 76, 136–151]. In existing literature, analytical pricing formulae were derived in the special case, where the payoff function is monotonic under risk-neutral measures. In this paper, we establish a unified framework for this new pricing approach so that its range of application can be significantly expanded. The results of I. Guo & S.-P. Zhu (2017) [Journal of Economic Dynamics and Control 76, 136–151] are extended to the case of non-monotonic payoffs (such as a butterfly spread option) under risk-neutral measures. We also provide numerical schemes for computing equal-risk prices under other measures such as the original physical measure. Furthermore, we demonstrate how short selling bans can affect the valuation of contingent claims by comparing equal-risk prices with Black–Scholes prices.

Keywords: Equal-risk pricing (ERP); short selling bans; valuation of contingent claims; non-monotonic payoff (search for similar items in EconPapers)
Date: 2022
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DOI: 10.1142/S0219024922500224

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