Arbitrage pricing of contingent claims (Q1072906)

In this monograph the concept of arbitrage pricing of contingent claims is developed. The following problems are studied: Is there a price for every contingent claim, is this price unique and independent of preferences of the investors? And how could one determine such valuations for specific contingent claims? These questions arise from Black/Scholes seminal work on the evaluation of an option pricing formula [\textit{F. Black} and \textit{M. Scholes}, J. Polit. Econ. 81, 637--654 (1973; Zbl 1092.91524)]. A survey of their results including related questions and the historical background of the problem is given by the author in chap. 2. The core chapters are chap. 3 and 4 where the formal model of pricing of contingent claims is developed. More precisely, a finite number of securities are considered which are being traded between an initial date 0 and a final date T. In chapter 3 only finitely many trading dates are allowed while in chap. 4 the generalization to a continuous trading model is considered. The continuous-time securities market model consists of a probability space (\(\Omega\),\({\mathcal F},P)\) where \(\omega\in \Omega\) represents a state of the world, the set [0,T] of trading dates of the given securities, an information structure and a security price process. Insofar it differs from a similar model of \textit{J. M. Harrison} and \textit{D. M. Kreps} [J. Econ. Theory 20, 381-408 (1979; Zbl 0431.90019)] as it allows for continuous-time trading. The arbitrage pricing concept is based on generating the contingent claims by means of a continuously adjusted portfolio that produces the same cash flows as the contingent claim and that apart from the initial investment requires no new funds to be invested over the trading time horizon \((=''self\)-financing'' portfolio). In contrast to the continuous-time models to be found in the literature the approach in the monograph is based on approximations. The continuous- time concepts (e.g. ''self-financing'' portfolio strategies) are introduced by limit arguments of discrete-time concepts using an economically meaningful convergence concept. Finally chapters 5 and 6 deal with extensions of the Black/Scholes formula and with the limitations of the valuation approach that has been introduced in chap. 4. Furthermore in a mathematical appendix several definitions and facts concerning modern martingale theory are collected to keep the monograph self-contained.