Two-Dimensional Risk-Neutral Valuation Relationships for the Pricing of Options

32 Pages Posted: 3 Aug 2004

See all articles by Guenter Franke

Guenter Franke

University of Konstanz - Department of Economics

James Huang

Lancaster University - Department of Accounting and Finance

Richard Stapleton

The University of Manchester - Division of Accounting and Finance

Date Written: March 2004

Abstract

We generalize the concept of a risk-neutral valuation relationship in order to price options in cases where the restrictive conditions required for a traditional one-dimensional risk-neutral valuation relationship do not apply. We derive conditions under which a two-dimensional risk-neutral valuation relationship exists, relating the price of an option on an asset to the prices of the underlying asset and one other option on the asset. This allows us to price contingent claims in economies where the pricing kernel exhibits non-constant elasticity.

Suggested Citation

Franke, Guenter and Huang, James Xiaoping and Stapleton, Richard, Two-Dimensional Risk-Neutral Valuation Relationships for the Pricing of Options (March 2004). Available at SSRN: https://ssrn.com/abstract=564902 or http://dx.doi.org/10.2139/ssrn.564902

Guenter Franke (Contact Author)

University of Konstanz - Department of Economics ( email )

Fach 147
Konstanz, 78457
Germany
+49 7531 88 2545 (Phone)
+49 7531 88 3559 (Fax)

James Xiaoping Huang

Lancaster University - Department of Accounting and Finance ( email )

The Management School
Lancaster LA1 4YX
United Kingdom
01 5245 93633 (Phone)
01 5248 47321 (Fax)

Richard Stapleton

The University of Manchester - Division of Accounting and Finance ( email )

Crawford House
Oxford Road
Manchester M13 9PL
United Kingdom

HOME PAGE: http://rstapleton.com/