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- Title
Asset pricing in an imperfect world.
- Authors
Cassese, Gianluca
- Abstract
In a model with no given probability measure, we consider asset pricing in the presence of frictions and other imperfections and characterize the property of coherent pricing, a notion related to (but much weaker than) the no-arbitrage property. We show that prices are coherent if and only if the set of pricing measures is non-empty, i.e., if pricing by expectation is possible. We then obtain a decomposition of coherent prices highlighting the role of bubbles. Eventually, we show that under very weak conditions, the coherent pricing of options implies a very clear representation which permits, as in Breeden and Litzenberger (J Bus 51:621-651, 1978), to extract the implied probability.
- Subjects
PROBABILITY theory; PRICING; PRICES; DECOMPOSITION method; ECONOMIC models
- Publication
Economic Theory, 2017, Vol 64, Issue 3, p539
- ISSN
0938-2259
- Publication type
Article
- DOI
10.1007/s00199-016-0999-7