Abstract
In reality, markets are incomplete, meaning that some payoffs cannot be replicated by trading in marketed securities. The classic no-arbitrage theory of valuation in a complete market, based on the unique price of a self-financing replicating portfolio, is not adequate for nonreplicable payoffs in incomplete markets. We focus on pricing over-the-counter derivative securities, surveying many proposed methodologies, drawing relationships between them, and evaluating their promise.
| Original language | English (US) |
|---|---|
| Pages (from-to) | 511-563 |
| Number of pages | 53 |
| Journal | Handbooks in Operations Research and Management Science |
| Volume | 15 |
| Issue number | C |
| DOIs | |
| State | Published - 2007 |
| Externally published | Yes |
Funding
The author is grateful for the support of the National Science Foundation under Grant No. DMS-0202958 and of the National Security Agency under Grant No. H98230-04-1-0047. He thanks Philippe Artzner, Aleš Černý, Dmitry Kramkov, and Costis Skiadas for valuable discussions and for suggesting references. He remains responsible for the views expressed and any errors.
ASJC Scopus subject areas
- Finance
- Economics and Econometrics
- Computer Science Applications
- Management Science and Operations Research