On the Pricing of Options in Incomplete Markets

Posted: 20 Mar 1997

See all articles by Bas J. M. Werker

Bas J. M. Werker

Tilburg University - Center for Economic Research (CentER)

Bertrand Melenberg

Tilburg University - Center for Economic Research (CentER)

Date Written: Undated

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 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.

JEL Classification: G13

Suggested Citation

Werker, Bas J.M. and Melenberg, Bertrand, On the Pricing of Options in Incomplete Markets (Undated). Available at SSRN: https://ssrn.com/abstract=8207

Bas J.M. Werker

Tilburg University - Center for Economic Research (CentER) ( email )

Econometrics and Finance Group
5000 LE Tilburg
Netherlands

Bertrand Melenberg (Contact Author)

Tilburg University - Center for Economic Research (CentER) ( email )

P.O. Box 90153
Tilburg, 5000 LE
Netherlands
+31 13 466 2730 (Phone)

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