On contingent claims pricing in incomplete markets: A risk sharing approach

Michail Anthropelos, Nikolaos E. Frangos, Stylianos Z. Xanthopoulos and Athanasios N. Yannacopoulos

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Abstract: In an incomplete market setting, we consider two financial agents, who wish to price and trade a non-replicable contingent claim. Assuming that the agents are utility maximizers, we propose a transaction price which is a result of the minimization of a convex combination of their utility differences. We call this price the risk sharing price, we prove its existence for a large family of utility functions and we state some of its properties. As an example, we analyze extensively the case where both agents report exponential utility.

Date: 2008-09, Revised 2012-02
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