On The Pricing Of Options In Incomplete Markets
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On the Pricing of Options in Incomplete Markets
Author | : Bas J. M. Werker |
Publisher | : |
Total Pages | : |
Release | : 1998 |
Genre | : |
ISBN | : |
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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 idiosyncrasy 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.