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2007
Wednesday, January 31, 2007 at 2:30 PM in MC 204
Pricing in Complete and Incomplete Markets
Traian Pirvu
Department of Mathematics
University of British Columbia
Abstract:
We begin by reviewing the binomial asset pricing model which is a complete market model. In the limit, the binomial model converges to an exponential Brownian motion model, a setup where Black-Scholes-Merton equation was derived. In reality markets are incomplete for many reasons (eg. jumps, market closures, illiquidity) and perfect risk transfer is not possible. We introduce a novel approach of pricing in incomplete markets "via" risk measures.