The valuation of contingent claims markets

Edward Schlee, Harris Schlesinger

Research output: Contribution to journalArticlepeer-review

1 Scopus citations

Abstract

This article studies an agent's valuation of the right to trade in a complete contingent claims market. The proposed measure generalizes the Pratt (1964) risk premium, which captures the willingness to pay to replace a given risky wealth prospect with an actuarially equivalent, nonrisky wealth. Specifically, we define a generalized risk premium to be the willingness to pay to trade at going market prices. If state prices are actuarially fair, the Pratt premium is obtained as a special case. We derive several properties of this generalized premium and note its relationship to the option price of a public project under uncertainty.

Original languageEnglish (US)
Pages (from-to)19-31
Number of pages13
JournalJournal of Risk and Uncertainty
Volume6
Issue number1
DOIs
StatePublished - Jan 1 1993

Keywords

  • complete markets
  • option price
  • risk premium
  • welfare under uncertainty

ASJC Scopus subject areas

  • Accounting
  • Finance
  • Economics and Econometrics

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