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Dynamic Asset Pricing Theory with Uncertain Time-Horizon
| Content Provider | Semantic Scholar |
|---|---|
| Author | Blanchet-Scalliet, Christophette Karoui, Nicole El Martellini, Lionel |
| Copyright Year | 2005 |
| Abstract | An investment horizon is in practice not frequently known with certainty at the initial investment date. This paper addresses the problem of pricing and hedging a random cash-flow received at a random date in a general stochastic environment. We first argue that specific timing risk is induced by the presence of an uncertain time-horizon if and only if the random time under consideration is not a stopping time of the filtration generated by prices of traded assets. In that context, we provide an explicit characterization of the set of equivalent martingale measures, as well as a necessary and sufficient condition for a convenient separation between adjustment for market risk and timing risk. These results allow us to clarify the definition of the market price for timing risk, and lead to general pricing formulae and explicit hedging strategies for random cash-flows in the presence of timing risk. Potential applications are the valuation of employee stock options, real options, catastrophe insurance contracts, credit derivatives, callable and convertible bonds, mortgage-backed securities, as well as any other asset featuring an embedded prepayment option. |
| Starting Page | 1737 |
| Ending Page | 1764 |
| Page Count | 28 |
| File Format | PDF HTM / HTML |
| DOI | 10.2139/ssrn.305010 |
| Alternate Webpage(s) | http://math1.unice.fr/~blanchet/daptuth.pdf |
| Alternate Webpage(s) | https://doi.org/10.2139/ssrn.305010 |
| Volume Number | 29 |
| Language | English |
| Access Restriction | Open |
| Content Type | Text |
| Resource Type | Article |
