Option Pricing in an Incomplete Market

Karen Grigorian () and Robert Jarrow ()
Additional contact information
Karen Grigorian: Department of Statistics and Applied Probability, University of California, Santa Barbara, CA 93106, USA

Quarterly Journal of Finance (QJF), 2024, vol. 14, issue 03, 1-16

Abstract: The purpose of this paper is to illustrate the pricing of options in an incomplete market using the new consistent uplifted martingale measure methodology introduced by Grigorian and Jarrow [2024, Filtration Reduction and Incomplete Markets, Frontiers of Mathematical Finance, 3(1), 78–105; 2023, Filtration Reduction and Completeness in Brownian Motion Models. Working Paper, Cornell University; 2024, Filtration Reduction and Completeness in Jump-Diffusion Models. Working Paper, Cornell University]. We apply it to an incomplete market where a stock has stochastic volatility. Two valuation formulas are generated, depending upon whether the trader is more concerned about volatility or price risk in the construction of a partial replicating portfolio for the option’s payoff.

Keywords: Option pricing; incomplete markets; martingale measures; risk-neutral valuation (search for similar items in EconPapers)
JEL-codes: G12 G13 (search for similar items in EconPapers)
Date: 2024
References: Add references at CitEc
Citations:

Downloads: (external link)
http://www.worldscientific.com/doi/abs/10.1142/S2010139224500095
Access to full text is restricted to subscribers

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:wsi:qjfxxx:v:14:y:2024:i:03:n:s2010139224500095

Ordering information: This journal article can be ordered from

DOI: 10.1142/S2010139224500095

Access Statistics for this article

Quarterly Journal of Finance (QJF) is currently edited by Fernando Zapatero

More articles in Quarterly Journal of Finance (QJF) from World Scientific Publishing Co. Pte. Ltd.
Bibliographic data for series maintained by Tai Tone Lim ().