publication . Article . Other literature type . 2002

Derivative pricing based on local utility maximization

Jan Kallsen;
Open Access
  • Published: 01 Jan 2002 Journal: Finance and Stochastics, volume 6, pages 115-140 (issn: 0949-2984, eissn: 1432-1122, Copyright policy)
  • Publisher: Springer Science and Business Media LLC
Abstract
This paper discusses a new approach to contingent claim valuation in general incomplete market models. We determine the neutral derivative price which occurs if investors maximize their local utility and if derivative demand and supply are balanced. We also introduce the sensitivity process of a contingent claim. This process quantifies the reliability of the neutral derivative price and it can be used to construct price bounds. Moreover, it allows to calibrate market models in order to be consistent with initially observed derivative quotations.
Subjects
free text keywords: Statistics, Probability and Uncertainty, Statistics and Probability, Finance, Option pricing, Incomplete markets, Local utility, Neutral derivative price, Sensitivity process, Local sensitivity, Rational pricing, Valuation of options, Valuation (finance), Incomplete markets, Derivative (finance), Economics, Supply and demand, Mathematical finance, Maximization, Microeconomics, jel:G13, jel:D52, jel:D58
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