Valuing contingent claims with different types of market incompleteness

Previous research has shown that frictions might have a significant impact on the value of a contingent claim, as discussed, for example, in Karatzas & Kou (1996)and Collin-Dufresne & Hugonnier (2002). We consider two types of frictions particularly important: frictions related to trading, such as portfolio constraints, andfrictions related to information. Although both types of frictions have b een considered in the literature, they have never been addressed in one model. In this paperwe develop a framework for hedging and valuing American contingent claims witharbitrary payoffs and infinite maturity in the presence of both portfolio constraints and incomplete information.