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Equilibrium Pricing of Derivative Securities in Dynamically Incomplete Markets

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Institutions, Equilibria and Efficiency

Part of the book series: Studies in Economic Theory ((ECON.THEORY,volume 25))

Summary

We develop a method of assigning unique prices to derivative securities, including options, in the continuous-time finance model developed in Raimondo [47]. 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 in closed form as a function of the underlying economic data.

This paper is dedicated to the memory of Birgit Grodal, whose strength and character we greatly admired. We are very grateful to Theo Diasakos, Darrell Duffie, Steve Evans, Botond Koszegi, Roger Purves, Jacob Sagi, Chris Shannon, Bill Zame and an anonymous refereee for very helpful discussions and comments. The work of both authors was supported by U.S. National Science Foundation Grant SES-9710424, Anderson’s work was also supported by U.S. National Science Foundation Grant SES-0214164, while Raimondo’s work was also supported by Australian Research Council grant DP0558187. Anderson is also grateful for the gracious hospitality of the Economic Theory Center at the University of Melbourne. Some of these results appeared previously in Anderson and Raimondo (2005).

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Author information

Authors and Affiliations

  1. Department of Economics, University of California, 549 Evans Hall 3880, Berkeley, CA, 94720-3880, USA

    Robert M. Anderson

  2. Department of Economics, University of Melbourne, Melbourne, Victoria, 3010, Australia

    Roberto C. Raimondo

Authors
  1. Robert M. Anderson
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  2. Roberto C. Raimondo
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Editor information

Editors and Affiliations

  1. Department of Economics, University of Copenhagen, Studienstræde 6, 1455, Copenhagen K, Denmark

    Christian Schultz

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Anderson, R.M., Raimondo, R.C. (2006). Equilibrium Pricing of Derivative Securities in Dynamically Incomplete Markets. In: Schultz, C., Vind, K. (eds) Institutions, Equilibria and Efficiency. Studies in Economic Theory, vol 25. Springer, Berlin, Heidelberg. https://doi.org/10.1007/3-540-28161-4_3

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