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Continuous time equilibrium pricing of nonredundant assets

Authors: Jouini, Elyes
Napp, Clotilde
Keywords: equilibrium;optimality;incomplete markets;nonredundant assets;derivatives pricing
Issue Date: 2-Feb-1999
Series/Report no.: FIN-99-008
Abstract: The problem of fair pricing of contingent claims is well understood in the context of an arbitrage free, complete financial market, with perfect information. But in the more realistic context of an incomplete market or with imperfect information, the arbitrage approach does not enable us to obtain a unique fair price for all contingent claims but only a fair pricing interval, which is known to be too large to be of great interest. We present here a new approach by exploiting partial conditions issued from equilibrium analysis. The explicit use of market clearing conditions enables us to obtain a unique preference-free admissible price. On a practical point of view, this enables us to give a unique fair price to any contingent claim. Moreover, on a theoretical point of view, this unique price appears to be only dependent on the real economy, as opposed to the financial one.
Appears in Collections:Finance Working Papers

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