On the Pricing of Contingent Claims with Frictions

A. Bensoussan and H. Julien

Mathematical Finance, 2000, vol. 10, issue 2, 89-108

Abstract: This paper studies the problem of pricing contingent claims in a market which has frictions in the form of costs, such as penalty functions corresponding to constraints. An arbitrage‐free interval is identified, and a fair price based upon utility functions is proposed. It provides a framework to study incomplete markets that is simplier than the one related to constraints on portfolios introduced by Karatzas and Kou.

Date: 2000
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