State prices implicit in valuation formulae for derivative securities: a martingale approach

Rady, Sven (1994) State prices implicit in valuation formulae for derivative securities: a martingale approach. Financial Markets Group Discussion Papers (181). Financial Markets Group, The London School of Economics and Political Science, London, UK.

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Abstract

Derivative assets analysis usually takes a model of the underlying price process as given and attempts to value derivative securities relative to that model. This paper studies the following "inverse" problem: given a valuation formula for a derivative asset, what can be inferred about the underlying asset price process? Assuming continuous sample paths, we show that a sufficiently regular pricing formula for some derivative asset completely determines the risk-neutral law of underlying price. In particular, such a valuation formula implies a unique set of state prices for payoffs contingent on the price path of the underlying security. As an illustration of our main result, we analyse certain pricing formulae for European options on zero-coupon bonds.

Item Type:	Monograph (Discussion Paper)
Official URL:	https://www.fmg.ac.uk/
Additional Information:	© 1994 The Author
Divisions:	Financial Markets Group
Subjects:	H Social Sciences > HC Economic History and Conditions H Social Sciences > HG Finance
JEL classification:	G - Financial Economics > G1 - General Financial Markets > G10 - General
Date Deposited:	17 May 2023 10:27
Last Modified:	11 Dec 2024 19:48
URI:	http://eprints.lse.ac.uk/id/eprint/119180

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