CNES, 2 place Maurice Quentin, 75039 Paris Cedex 01, France,;Caisse d'Epargne, 75008 Paris, France
Abstract:
This paper studies the problem of pricing contingent claims in a market which has frictions in the form of costs, such as penalty functions corresponding to constraints. An arbitrage-free interval is identified, and a fair price based upon utility functions is proposed. It provides a framework to study incomplete markets that is simplier than the one related to constraints on portfolios introduced by Karatzas and Kou.