The Valuation of Contingent Claims Markets

Edward Schlee and Harris Schlesinger

Journal of Risk and Uncertainty, 1993, vol. 6, issue 1, 19-31

Abstract: This article studies an agent's valuation of the right to trade in a complete contingent claims market. The proposed measure generalizes the Pratt(1964) risk premium, which captures the willingness to pay to replace a given risky wealth prospect with an actuarially equivalent, nonrisky wealth. Specifically, we define a generalized risk premium to be the willingness to pay to trade at going market prices. If state prices are actuarially fair, the Pratt premium is obtained as a special case. We derive several properties of this generalized premium and note its relationship to the option price of a public project under uncertainty. Copyright 1993 by Kluwer Academic Publishers

Date: 1993
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