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Risk neutral compatibility with option prices (2006)
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BibTeX
@TECHREPORT{Jacod06riskneutral,
author = {Jean Jacod and Philip Protter},
title = {Risk neutral compatibility with option prices},
institution = {},
year = {2006}
}
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Abstract
Abstract A common problem is to choose a “risk neutral ” measure in an incomplete market in asset pricing models. We show in this paper that in some circumstances it is possible to choose a unique “equivalent local martingale measure ” by completing the market with option prices. We do this by modeling the behavior of the stock price X, together with the behavior of the option prices for a relevant family of options which are (or can theoretically be) effectively traded. In doing so, we need to ensure a kind of ’‘compatibility ” between X and the prices of our options, and this poses some significant mathematical difficulties.
