Market Clearing and Derivative Pricing

Robert M. Anderson and Roberto C. Raimondo
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Robert M. Anderson: University of California, Berkeley
Roberto C. Raimondo: University of Melbourne

No 03-17, Discussion Papers from University of Copenhagen. Department of Economics

Abstract: We develop a method of assigning unique prices to derivative securities, including options, in the continuous-time finance models developed in Raimondo [45] and Anderson and Raimondo [6]. In contrast with the martingale method of valuing options, which cannot distinguish among infinitely many possible option pricing processes for a given underlying securities price process when markets are dynamically incomplete, our option prices are uniquely determined in equilibrium as a function of the underlying economic data and the underlying securities price process; in the single-agent model, this function is given in closed form.

Pages: 17 pages
Date: 2003-04
New Economics Papers: this item is included in nep-fin and nep-rmg
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