Market-Consistent Prices for General Payoffs

Pablo Koch-Medina and Cosimo Munari
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Pablo Koch-Medina: University of Zurich, Department of Banking and Finance
Cosimo Munari: University of Zurich, Department of Banking and Finance

Chapter 8 in Market-Consistent Prices, 2020, pp 147-157 from Springer

Abstract: Abstract In this chapter we extend the concept of a market-consistent price, i.e., a price that is consistent with the prices of the basic securities traded in the market, from replicable payoffs to general, not necessarily replicable, payoffs. Because this extension relies on the strict positivity of the pricing functional, we focus exclusively on arbitrage-free markets. We show that, given the market environment, the set of prices at which rational buyers and sellers will contemplate transacting a nonreplicable payoff is a bounded open interval. We provide a variety of descriptions of this interval. The upper bound is the superreplication price and corresponds to the threshold above which no buyer should be willing to transact. The lower bound is the subreplication price and corresponds to the threshold below which no seller should be willing to transact.

Date: 2020
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Persistent link: https://EconPapers.repec.org/RePEc:spr:sprchp:978-3-030-39724-1_8

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DOI: 10.1007/978-3-030-39724-1_8

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