Arbitrage and universal pricing

✍ Scribed by David G. Luenberger

• Publisher: Elsevier Science
• Year: 2002
• Tongue: English
• Weight: 146 KB
• Volume: 26
• Category: Article
• ISSN: 0165-1889
• DOI: 10.1016/s0165-1889(01)00087-2

✦ Synopsis

This paper considers two methods for pricing assets and examines the relations between them. The ÿrst method is based on the principle of no-arbitrage, which asserts that introduction of the new asset should not create an arbitrage in a market that was before arbitrage free. This condition is satisÿed by prices for the new asset between speciÿc lower and upper limits, determined as the values of certain linear programming problems. The duals of these problems determine a pricing random variable. In the second method of pricing, a new asset is priced so that a given utility maximizing investor will include this asset in his or her portfolio at a zero level. The corresponding price is called the zero-level price. A zero-level price is universal for a class of utility functions if it is a zero-level price for every utility function within that class. This paper shows that universal zero-level prices exist in several important situations.