On the Pricing of Options in Incomplete Markets

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Abstract

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
PublisherFinance
Number of pages20
Volume1996-19
Publication statusPublished - 1996

Publication series

NameCentER Discussion Paper
Volume1996-19

Fingerprint

Option pricing
Pricing
Incomplete markets
Black-Scholes
Complete markets
Formalization
Incompleteness
Stochastic volatility
Continuous time

Keywords

  • option pricing
  • incomplete markets

Cite this

Melenberg, B., & Werker, B. J. M. (1996). On the Pricing of Options in Incomplete Markets. (CentER Discussion Paper; Vol. 1996-19). Tilburg: Finance.
Melenberg, B. ; Werker, B.J.M. / On the Pricing of Options in Incomplete Markets. Tilburg : Finance, 1996. (CentER Discussion Paper).
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Melenberg, B & Werker, BJM 1996 'On the Pricing of Options in Incomplete Markets' CentER Discussion Paper, vol. 1996-19, Finance, Tilburg.

On the Pricing of Options in Incomplete Markets. / Melenberg, B.; Werker, B.J.M.

Tilburg : Finance, 1996. (CentER Discussion Paper; Vol. 1996-19).

Research output: Working paperDiscussion paperOther research output

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T1 - On the Pricing of Options in Incomplete Markets

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AU - Werker, B.J.M.

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N2 - 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.

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Melenberg B, Werker BJM. On the Pricing of Options in Incomplete Markets. Tilburg: Finance. 1996. (CentER Discussion Paper).