ISSN:
1467-9965
Source:
Blackwell Publishing Journal Backfiles 1879-2005
Topics:
Mathematics
,
Economics
Notes:
In a stochastic volatility model, the no-free-lunch assumption does not induce a unique arbitrage price because of market incompleteness. In this paper, we consider a contingent claim on the primitive asset, traded in zero net supply. Given a system of Arrow-Debreu state prices, we provide necessary and sufficient conditions for consistency with an intertemporal additive equilibrium model that we fully characterize. We show that the risk premia corresponding to the minimal martingale of Föllmer and Schweizer (1991) are consistent with logarithmic preferences, while the Hull and White model (1987) (volatility risk premium independent of the asset price) is consistent with a class of utility functions including constant relative risk aversion (CRRA) ones.
Type of Medium:
Electronic Resource
URL:
http://dx.doi.org/10.1111/j.1467-9965.1996.tb00078.x
