On the Relationship of the Dynamic Programming Approach and the Contingent Claim Approach to Asset Valuation

Posted: 21 Oct 1999

See all articles by Thomas S. Knudsen

Thomas S. Knudsen

Bankers Trust

Bernhard Meister

Goldman Sachs Group, Inc. - Japan Office

Mihail Zervos

King's College London - Department of Mathematics

Abstract

We consider a general model for an investment producing a single commodity, and, assuming that there exists a traded asset spanning the corresponding market, we prove a "verification theorem" which relates the solution of an appropriate differential equation with the investment's contingent claim price. In this way, we show in a mathematically rigorous way that the contingent claim approach and the dynamic programming approach to the problem of asset valuation are equivalent, modulo parameter calibration. Our analysis can be used in a straightforward way to address a big number of investment models.

JEL Classification: D46, G12, G13, G31

Suggested Citation

Knudsen, Thomas S. and Meister, Bernhard and Zervos, Mihail, On the Relationship of the Dynamic Programming Approach and the Contingent Claim Approach to Asset Valuation. Available at SSRN: https://ssrn.com/abstract=179555

Thomas S. Knudsen

Bankers Trust ( email )

1 Appold Street
Broadgate
London EC2A 2HE
United Kingdom

Bernhard Meister

Goldman Sachs Group, Inc. - Japan Office ( email )

ARK Mori Bldg. 5F 12-32 Akasaka 1-chome
Minato-ku, Tokyo 107
Japan

Mihail Zervos (Contact Author)

King's College London - Department of Mathematics ( email )

Strand
Strand
London, WC2R 2LS
United Kingdom

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