Pricing of Non-redundant Derivatives in a Complete Market

Elyès Jouini () and Pierre-Francois Koehl

New York University, Leonard N. Stern School Finance Department Working Paper Seires from New York University, Leonard N. Stern School of Business-

Abstract: We consider a complete financial market with primitive assets and derivatives on these primitive assets. Nevertheless, the derivative as sets are non-redundant in the market, in the sense that the market is complete, only with their existence. In such a framework, we derive an equilibrium restriction on the admissible prices of derivative assets. The equilibrium condition imposes a well-ordering principle restricting the set of probability measures that qualify as candidate equivalent martingale measures. This restriction is preference free and applies whenever the utility functions belong to the general class of Von-Neuman Morgenstern functions. We provide numerical examples that show the applicability of the restriction for the computation of option prices.

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Related works:
Working Paper: Pricing of Non-redundant Derivatives in a Complete Market (1998)
Working Paper: Pricing of Non-redundant Derivatives in a Complete Market (1998)
Working Paper: Pricing of Non-redundant Derivatives in a Complete Market (1997)
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