2 3 Ja n 20 07 Pricing Options in Incomplete Equity Markets via the Instantaneous Sharpe Ratio
نویسنده
چکیده
Abstract: We develop a theory for pricing in incomplete equity markets by assuming that the investor issuing an unhedgeable derivative security requires compensation for this risk in the form of a pre-specified instantaneous Sharpe ratio. First, we apply our method to price options on non-traded assets for which there is a traded asset that is correlated to the non-traded asset. Second, we apply our method to price options in the presence of stochastic volatility. We use comparison arguments to demonstrate that the prices in these two examples satisfy a number of desirable properties.
منابع مشابه
J ul 2 00 7 Pricing Options in Incomplete Equity Markets via the Instantaneous Sharpe Ratio
Abstract: We use a continuous version of the standard deviation premium principle for pricing in incomplete equity markets by assuming that the investor issuing an unhedgeable derivative security requires compensation for this risk in the form of a pre-specified instantaneous Sharpe ratio. First, we apply our method to price options on non-traded assets for which there is a traded asset that is...
متن کاملReassessing the Equity Premium Puzzle Using Micro Data
I investigate empirically the ability of financial market incompleteness to help explaining the equity premium puzzle. I estimate the non-diversifiable component of the cross-sectional volatility of income and examine its cyclical properties. Equipped with these estimates, I compute the implied equilibrium Sharpe-ratio of excess returns and evaluate the ability of idiosyncratic risk to improve ...
متن کاملSharpe-ratio pricing and hedging of contingent claims in incomplete markets by convex programming
We analyze the problem of pricing and hedging contingent claims in a financial market described by a multi-period, discrete-time, finite-state scenario tree using an arbitrage-adjusted Sharpe-ratio criterion. We show that the writer’s and buyer’s pricing problems are formulated as conic convex optimization problems which allow to pass to dual problems over martingale measures and yield tighter ...
متن کاملFinancial Valuation of Mortality Risk via the Instantaneous Sharpe Ratio: Applications to Pricing Pure Endowments
We develop a theory for pricing non-diversifiable mortality risk in an incomplete market. We do this by assuming that the company issuing a mortality-contingent claim requires compensation for this risk in the form of a pre-specified instantaneous Sharpe ratio. We prove that our ensuing valuation formula satisfies a number of desirable properties. For example, we show that it is subadditive in ...
متن کاملPricing life insurance under stochastic mortality via the instantaneous Sharpe ratio, working paper
We develop a pricing rule for life insurance under stochastic mortality in an incomplete market by assuming that the insurance company requires compensation for its risk in the form of a pre-specified instantaneous Sharpe ratio. Our valuation formula satisfies a number of desirable properties, many of which it shares with the standard deviation premium principle. The major result of the paper i...
متن کامل