We study the uniqueness of the utility based price of contingent claims in a semimartingale model of incomplete financial market. In particular, we obtain that a necessary and sufficient condition for all bounded contingent claims to admit a unique utility based price is that the solution to the dual problem defines an equivalent local martingale measure.

We give a new proof of the Dalang-Morton-Willinger theorem, relating the no-arbitrage condition in stochastic securities market models to the existence of an equivalent martingale measure with bounded density for a d-dimensional stochastic sequence (Sn) N n=0 of stock prices. Roughly speaking, the proof is reduced to the assertion that under the no-arbitrage condition for N = 1 and S ∈ L there ...

It is shown that delta hedging provides the optimal trading strategy in terms of minimal required initial capital to replicate a given terminal payoff in a continuous-time Markovian context. This holds true in market models where no equivalent local martingale measure exists but only a square-integrable market price of risk. A new probability measure is constructed, which takes the place of an ...

In traditional econometrics, the quality of an individual investment – and of the investment portfolio – is characterized by its expected return and its risk (variance). For an individual investment or portfolio, we can estimate the future expected return and a future risk by tracing the returns x1, . . . , xn of this investment (and/or similar investments) over the past years, and computing th...

This paper develops a model to examine the impacts of uncertainty about crop production and irreversibility of program participation on determining land rental payments and least-cost land retirement targeting in the Conservation Reserve Enhancement Program. Results show that under risk aversion only, the marginal cost of abatement and the average land rental payment are less than those under r...

This article explores the effect of a subset of symmetric bidders joining to bid together. Possible applications include mergers, collusion and joint-bidding arrangements. The change produces a "strong" party with a more advantageous value distribution than the remaining "weak" bidder(s). The predicted effects include ineffi ciency, a decrease in the seller’s revenue, and higher bidders’payoffs...

Evidence on Individual Preferences for Longevity Risk The standard model of intertemporal choice assumes risk neutrality toward the length of life: due to additivity, agents are not sensitive to a mean preserving spread in the length of life. Using a survey fielded in the RAND American Life Panel (ALP), this paper provides empirical evidence on possible deviation from risk neutrality with respe...

In the standard real options approach to investment under uncertainty, agents formulate optimal policies under the assumptions of risk neutrality or perfect capital markets. However, in most situations, corporate executives face incomplete markets either because they receive compensation packages that restrict their portfolios or because cash flows from the firm’s investment opportunities are n...

In this paper, we consider the pricing effects of noisy risk disclosure. We show that uncertainty over the riskiness of a firm’s cash flows is priced and that risk disclosure decreases the cost of capital in both single and multi-asset settings. We find that mean and risk disclosure are substitutes, and that firms acquire and disclose more risk information when they discover that risks are high...

Investors in equilibrium are modeled as facing investor speci ̄c risks across the space of assets. Personalized asset pricing models re°ect these risks. Averaging across the pool of investors we obtain a market asset pricing model that re°ects market risk exposures. It is observed on invoking a law of large numbers applied to an in ̄nite population of investors that many personally relevant risk ...