Option Prices Sustained by Risk‐Preferences*

Abstract

We investigate the preference and distribution restrictions that underlie explicit risk‐neutral option valuation equations. We establish new sufficient conditions in terms of utility functions and joint distributions of assets' payoffs and state variables for these models to hold in equilibrium economies where markets are dynamically incomplete. In our models, both the marginal and conditional distributions of wealth play relevant roles in obtaining the pricing kernel implicit in the model. This result shows no straightforward link between the Black‐Scholes model and constant proportional risk‐aversion preferences. We introduce and investigate many univariate and multivariate option pricing models.

Cite this work

No public copy is stored for this record, so only the metadata is cited.

Stored only when both papers are in the corpus — 22 citations exist upstream.