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On the Pricing of Contingent Claims with Frictions
Author(s) -
Bensoussan A.,
Julien H.
Publication year - 2000
Publication title -
mathematical finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.98
H-Index - 81
eISSN - 1467-9965
pISSN - 0960-1627
DOI - 10.1111/1467-9965.00083
Subject(s) - arbitrage , economics , incomplete markets , interval (graph theory) , microeconomics , mathematical economics , financial economics , econometrics , mathematics , combinatorics
This paper studies the problem of pricing contingent claims in a market which has frictions in the form of costs, such as penalty functions corresponding to constraints. An arbitrage‐free interval is identified, and a fair price based upon utility functions is proposed. It provides a framework to study incomplete markets that is simplier than the one related to constraints on portfolios introduced by Karatzas and Kou.