On the Pricing of Options in Incomplete Markets

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In this paper we reconsider the pricing of options in incomplete continuous time markets.We first discuss option pricing with idiosyncratic stochastic volatility.This leads, of course, to an averaged Black-Scholes price formula.Our proof of this result uses a new formalization of idiosyncraticy which encapsulates other definitions in the literature.Our method of proof is subsequently generalized to other forms of incompleteness and systematic (i.e. non-idiosyncratic) information.Generally this leads to an option pricing formula which can be expressed as the average of a complete markets formula.
Original languageEnglish
Place of PublicationTilburg
Number of pages20
Publication statusPublished - 1996

Publication series

NameCentER Discussion Paper


  • option pricing
  • incomplete markets


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