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On the Pricing of Options in Incomplete Markets

Melenberg,B.
; 
Werker,B.J.M.
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.
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Pagination: 20
Date
1996
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Volume Title
Publisher
Finance
Collections
Tilburg University Research Output Collection
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Keywords
option pricing, incomplete markets
Citation
Melenberg, B & Werker, B J M 1996 'On the Pricing of Options in Incomplete Markets' CentER Discussion Paper, vol. 1996-19, Finance, Tilburg.
URI
https://hdl.handle.net/20.500.14602/26307
License
info:eu-repo/semantics/restrictedAccess
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