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Valuation and Martingale properties of shadow prices

Foldes, Lucien (2000) Valuation and Martingale properties of shadow prices. 342. Financial Markets Group, London School of Economics and Political Science, London, UK.

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Identification Number: 342

Abstract

Concepts of asset valuation based on the martingale properties of shadow (or marginal utility) prices in continuous-time, infinite-horizon stochastic models of optimal saving and portfolio choice are reviewed and compared with their antecedents in static or deterministic economic theory. Applications of shadow pricing to valuation are described, including a new derivation of the Black-Scholes formula and a generalised net present value formula for valuing an indivisible project yielding a random income. Some new results are presented concerning (I) the characterisation of an optimum in a model of saving with an exogenous random income and (ii) the use of random time transforms to replace local by true martingales in the martingale and transversality conditions for optimal saving and portfolio choice.

Item Type: Monograph (Discussion Paper)
Official URL: http://fmg.lse.ac.uk
Additional Information: © 2000 the author
Subjects: H Social Sciences > HB Economic Theory
Q Science > QA Mathematics
Sets: Research centres and groups > Financial Markets Group (FMG)
Collections > Economists Online
Departments > Economics
Collections > LSE Financial Markets Group (FMG) Working Papers
Date Deposited: 29 May 2008 13:18
Last Modified: 27 Feb 2014 15:36
URI: http://eprints.lse.ac.uk/id/eprint/5139

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