Title

VALUATION OF GENERAL CONTINGENT CLAIMS WITH SHORT SELLING BANS: AN EQUAL-RISK PRICING APPROACH

Publication Name

International Journal of Theoretical and Applied Finance

Abstract

This paper studies the valuation of general contingent claims with short selling bans under the equal-risk pricing (ERP) framework proposed in I. Guo & S.-P. Zhu (2017) [Journal of Economic Dynamics and Control 76, 136-151]. In existing literature, analytical pricing formulae were derived in the special case, where the payoff function is monotonic under risk-neutral measures. In this paper, we establish a unified framework for this new pricing approach so that its range of application can be significantly expanded. The results of I. Guo & S.-P. Zhu (2017) [Journal of Economic Dynamics and Control 76, 136-151] are extended to the case of non-monotonic payoffs (such as a butterfly spread option) under risk-neutral measures. We also provide numerical schemes for computing equal-risk prices under other measures such as the original physical measure. Furthermore, we demonstrate how short selling bans can affect the valuation of contingent claims by comparing equal-risk prices with Black-Scholes prices.

Open Access Status

This publication is not available as open access

Article Number

2250022

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Link to publisher version (DOI)

http://dx.doi.org/10.1142/S0219024922500224