Option pricing in incomplete markets

Option Pricing In Incomplete Markets

Option pricing in incomplete markets

Expectedutilitymaximization is a very useful approach for pricing options in an incomplete market. The results from this approach contain many important features observed by practitioners. However, under this approach, the option prices are determined by a set of coupled nonlinear partial differential equations in high dimensions. Thus, it represents numerous significant difficulties in both th...

A GARCH Option Pricing Model in Incomplete Markets∗

We propose a new method for pricing options based on GARCH models with filtered historical innovations. In an incomplete market framework we allow for different distributions of the historical and the pricing return dynamics enhancing the model flexibility to fit market option prices. An extensive empirical analysis based on S&P 500 index options shows that our model outperforms other competing...

Pricing the Option to Surrender in Incomplete Markets

New international accounting standards requires insurers to reflect the value of embedded options and guarantees in their products. Pricing techniques based on the Black & Scholes paradigm are often used, however, the hypotheses underneath this model are rarely met. We propose a framework that encompasses the most known sources of incompleteness. We show that the surrender option, joined with a...

Utility-Based Derivative Pricing in Incomplete Markets

In recent years various suggestions concerning contingent claim valuation in incomplete markets have been made. We argue that some of them can be naturally interpreted in terms of neutral derivative prices which occur if derivative demand and supply are balanced. Secondly, we introduce the notion of consistent derivative pricing which is a way of constructing market models that are consistent w...