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Equilibrium Pricing in Incomplete Markets

Published online by Cambridge University Press:  06 April 2009

Abdelhamid Bizid  and
Elyès Jouini
Abdelhamid Bizid
Affiliation:
abdelhamid.bizid@rabobank.com, Rabo Securities, Fund Derivatives Structuring, Thames Court, One Queenhithe, London, EC4V 3RL, U.K.
Elyès Jouini
Affiliation:
jouini@ceremade.dauphine.fr, Université Paris 9-Dauphine and Institute Universitaire de France, Place du Maréchal de Lattre de Tassigny, 75 775 Paris Cedex 16, France.
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Abstract

Given the exogenous price process of some assets, we constrain the price process of other assets that are characterized by their final payoffs. We deal with an incomplete market framework in a discrete-time model and assume the existence of the equilibrium. In this setup, we derive restrictions on the state-price deflators. These restrictions do not depend on a particular choice of utility function. We investigate numerically a stochastic volatility model as an example. Our approach leads to an interval of admissible prices that is more robust than the arbitrage pricing interval.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 40 , Issue 4 , December 2005 , pp. 833 - 848
Copyright
Copyright © School of Business Administration, University of Washington 2005

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