The fact that properly normalized asset prices are martingales is the basis of modern asset pricing. One normalizes asset prices to adjust for risk and time preferences. Both adjustments can be made simultaneously via a stochastic discount factor, or one can adjust for risk by changing...

Let Q be the set of equivalent martingale measures for a given process S, and let X be a process which is a local supermartingale with respect to any measure in Q. The optional decomposition theorem for X states that there exists a predictable integrand ф such that the difference X−ф•S is...

Let Q be the set of equivalent martingale measures for a given process S, and let X be a process which is a local supermartingale with respect to any measure in Q. The optional decomposition theorem for X states that there exists a predictable integrand ф such that the difference...

We analyze a general business tax in an uncertain economy. Our tax system allows for a time-dependent tax rate and to this end we incorporate a generalized allowance for corporate equity (ACE). The generalized allowance is given by a fraction of the product of interest rate and book value of the...

This paper defines the value of a general claim based on agent's preferences and coherent with the No Arbitrage Principle. This Value is a non trivial extension of the certainty equivalent since it takes into consideration the possibility of partially hedging the risk carried by the claim. When...

Let ${\cal Q}$ be the set of equivalent martingale measures for a given process $S$, and let $X$ be a process which is a local supermartingale with respect to any measure in ${\cal Q}$. The optional decomposition theorem for $X$ states that there exists a predictable integrand $\varphi$ such...

Margrabe provides a pricing formula for an exchange option where the distributions of both stock prices are log-normal with correlated Wiener components. Merton has provided a formula for the price of a European call option on a single stock where the stock price process contains a continuous...

We consider a market consisting of multiple assets under jump-diffusion dynamics with European style options written on these assets. It is well-known that such markets are incomplete in the Harrison and Pliska sense. We derive a pricing relation by adopting a Radon-Nikodym derivative based on...

This paper is devoted to giving simpler proofs of the two fundamental theorems of asset pricing theory, in iscrete-time and finite horizon: namely the no-arbitrage theorem, and the market completeness theorem. Some elementary but apparently new results are also given on discrete-time martingale...

Restrictions on the risk-pricing in dynamic term structure models (DTSMs) can unleash the power of no-arbitrage by creating a tighter link between cross-sectional and time-series variation of interest rates. This paper presents a new econometric framework for estimation of affine Gaussian DTSMs...