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Spanning the State Space with Options

Published online by Cambridge University Press:  06 April 2009

Fred D. Arditti  and
Kose John
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Extract

In the Arrow-Debreu approach to uncertainty it has been recognized that an inadequate number of markets in contingent claims would be a source of inefficiency. Several researchers have studied the allocative inefficiencies resulting from incomplete markets, i.e., when the number of independent securities is less than the number of states and therefore the state-space cannot be “spanned” by those securities. In a situation where the number of primitive assets is inadequate to span the state-space, the new spanning opportunities opened up by derived assets written on the primitives is an interesting question.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 15 , Issue 1 , March 1980 , pp. 1 - 9
Copyright
Copyright © School of Business Administration, University of Washington 1980

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References

REFERENCES

[1]Mangasarian, O. L.Nonlinear Programming. New York: McGraw-Hill (1969).Google Scholar
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[3]Rudin, W.Principles of Mathematical Analysis, 3rd ed.New York: McGraw-Hill (1976).Google Scholar