Cahiers du CEREMADE 

Unité
Mixte de Recherche du C.N.R.S. N°7534 

Abstract : We consider the problem of valuing European options in a complete market but with incomplete data. Typically, when the underlying asset dynamics is not specified, the martingale probability measure is unknown. Given a consensus on the actual distribution of the underlying price at maturity, we derive an upper bound on the call option price by putting two kind of restrictions on the pricing probability measure. First, we put a restriction on the second riskneutral moment of the underlying asset terminal value. Second, from equilibrium pricing arguments one can put a monotonicity restriction on the RadonNikodym density of the pricing probability with respect to the true probability measure. This density is restricted to be a nonincreasing function of the underlying price at maturity. The bound appears then as the solution of a constrained optimization problem and we adopt a duality approach to solve it. Explicit bounds are provided for the call option. Finally, we provide a numerical example. 





200735 

12072007 

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