March 2, 1999
Elyes Jouini, Pierre-Francois Koehl and Abdelhamid Bizid
ABSTRACT
We consider a complete financial market with primitive assets and derivatives on these primitive assets. Nevertheless,
the derivative as sets are non-redundant in the market, in the sense that the market is complete, only with their
existence. In such a framework, we derive an equilibrium restriction on the admissible prices of derivative assets.
The equilibrium condition imposes a well-ordering principle restricting the set of probability measures that qualify
as candidate equivalent martingale measures. This restriction is preference free and applies whenever the utility
functions belong to the general class of Von-Neuman Morgenstern functions. We provide numerical examples that show
the applicability of the restriction for the computation of option prices.
Jouini: (212) 998-0279 ejouini@stern.nyu.edu
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