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Asset Pricing in Discrete TimeA Complete Markets Approach$
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Ser-Huang Poon and Richard Stapleton

Print publication date: 2005

Print ISBN-13: 9780199271443

Published to Oxford Scholarship Online: July 2005

DOI: 10.1093/0199271445.001.0001

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VALUATION OF CONTINGENT CLAIMS: EXTENSIONS

VALUATION OF CONTINGENT CLAIMS: EXTENSIONS

Chapter:
(p.57) 4 VALUATION OF CONTINGENT CLAIMS: EXTENSIONS
Source:
Asset Pricing in Discrete Time
Author(s):

Ser-Huang Poon (Contributor Webpage)

Richard Stapleton (Contributor Webpage)

Publisher:
Oxford University Press
DOI:10.1093/0199271445.003.0004

‘Valuation of Contingent Claims: Extensions’ extends the analysis in Ch. 3 to contingent claims on assets with non-lognormal distributions, for example, normal distributions, as in the Brennan (1979), and generalized lognormal distributions, as in the shifted lognormal case of Rubinstein (1983). Next, the authors consider the pricing of claims where risk-neutral valuation relationships do not exist. For this case, they discuss Heston (1993)'s extension to the case of ‘preference-parameter free valuation relationships’, where at least one preference parameter in the pricing kernel becomes irrelevant for the pricing of contingent claims. Then, they derive the related results in Franke, Stapleton, and Subrahmanyam (1999) who showed that if assets are lognormal, but the pricing kernel has declining elasticity, possibly due to background risk, then all options have higher prices than in the Black–Scholes world. Finally, they discuss the bounds on option prices in such economies.

Keywords:   background risk, bounds on option prices, Brennan (1979), declining elasticity, Franke, Heston (1993), non-lognormal distributions, preference-parameter free valuation relationships, Rubinstein (1983), Stapleton and Subrahmanyam (1999)

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