02088cam a22002657 4500001000600000003000500006005001700011008004100028100002500069245016400094260006600258490004100324500001900365520095000384530006101334538007201395538003601467690009101503700001901594700001801613710004201631830007601673856003701749856003601786w6250NBER20141229120214.0141229s1997 mau||||fs|||| 000 0 eng d1 aBertsimas, Dimitris.10aPricing and Hedging Derivative Securities in Incomplete Marketsh[electronic resource]:bAn E-Aritrage Model /cDimitris Bertsimas, Leonid Kogan, Andrew W. Lo. aCambridge, Mass.bNational Bureau of Economic Researchc1997.1 aNBER working paper seriesvno. w6250 aNovember 1997.3 aGiven a European derivative security with an arbitrary payoff function and a corresponding set of" underlying securities on which the derivative security is based, we solve the dynamic replication problem: find a" self-financing dynamic portfolio strategy involving only the underlying securities that most closely" approximates the payoff function at maturity. By applying stochastic dynamic programming to the minimization of a" mean-squared-error loss function under Markov state-dynamics, we derive recursive expressions for the optimal-replication strategy that are readily implemented in practice. The approximation error or " " of the optimal-replication strategy is also given recursively and may be used to quantify the "degree" of market incompleteness. " To investigate the practical significance of these -arbitrage strategies examples including path-dependent options and options on assets with stochastic volatility and jumps. " aHardcopy version available to institutional subscribers. aSystem requirements: Adobe [Acrobat] Reader required for PDF files. aMode of access: World Wide Web. 7aG13 - Contingent Pricing • Futures Pricing2Journal of Economic Literature class.1 aKogan, Leonid.1 aLo, Andrew W.2 aNational Bureau of Economic Research. 0aWorking Paper Series (National Bureau of Economic Research)vno. w6250.4 uhttp://www.nber.org/papers/w625041uhttp://dx.doi.org/10.3386/w6250