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from Part V - Applications in Financial Economics
Published online by Cambridge University Press: 27 May 2021
In this chapter we present an approach to pricing in incomplete markets where, instead of looking for a unique price, we look for "reasonable" pricing bounds. The term reasonable is formalized as a bound on the market price of risk, and it turns out that the "good-deal bounds" can be computed by solving a standard stochastic control problem. The theory is then applied to an example.
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