Dynamic Asset Pricing Theory with Uncertain Time-Horizon

Christophette Blanchet-Scalliet, Nicole El Karoui, Lionel Martellini: This paper addresses the problem of pricing and hedging a random cash-flow received at a random date in a general stochastic environment.

Author(s) :

Christophette Blanchet-Scalliet

Université de Nice-Sophia-Antipolis

Nicole El Karoui

Ecole Polytechnique

Lionel Martellini

EDHEC Business School

Presentation :

We first argue that specific timing risk is induced by the presence of an uncertain time-horizon if and only if the random time under consideration is not a stopping time of the filltration generated by prices of traded assets. In that context, we provide an explicit characterisation of the set of equivalent martingale measures, as well as a necessary and sufficient condition for a convenient separation between adjustment for market risk and timing risk. We also present price bounds consistent with perfect replication in the absence of arbitrage for an asset paying off a random amount at a random time. As is often the case, such bounds are actually too wide to be of any practical use and we consider several choices (minimal martingale measure, minimum entropy measure) for narrowing down to one the number of equivalent martingale measures.
Dynamic Asset Pricing Theory with Uncertain Time-Horizon...
(-1.00 B)
Type : Working paper
Date : le 01/07/2004
Extra information : For more information, please contact EDHEC Research and Development Department [ research@drd.edhec.edu ]
Research Cluster : Finance

See Also

- 08-09-2017
Ranked 4th in France, EDHEC reinforces its position in the world’s Top 20 (16th place) in the 2017 Financial Times Master in Management Ranking, among prestigious international institutions...
- 30-08-2017
EDHEC welcomes students and participants who are back to school in the upcoming weeks. A positive and international atmosphere (more than 100 nationalities expected) shines through our...
Innovation with limited resources (Video)
- 18-08-2017
The article "Innovation with Limited Resources: Management Lessons from the German...
Station F successfully inaugurated in the presence of Emmanuel Macron and EDHEC
- 29-06-2017
EDHEC announced this May that it had joined Station F, the world’s biggest start-up...