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Published in:
2011 | OriginalPaper | Chapter
Minimum Regret Pricing of Contingent Claims in Incomplete Markets
Authors : C. Kountzakis, S. Z. Xanthopoulos, A. N. Yannacopoulos
Published in: Dynamics, Games and Science I
Publisher: Springer Berlin Heidelberg
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In this paper we propose a contingent claim pricing scheme between two counterparties in an incomplete one period market. According to our approach the two counterparties of a non-marketed contingent claim select a pair of pricing kernels, in order to agree on a common price, by minimizing their joint regret function, which quantifies the departure from their initial beliefs. The joint regret function is a convex combination of entropy-like or norm-dependent functionals. The relevant optimization problem is posed in terms of a partially finite convex programming problem in the space of pricing kernels.