Abstract
In this paper we show that a Kelly trader is indifferent to trade a derivative if and only if the no-arbitrage price is uniquely given by the minimal martingale measure price, thus providing a natural selection mechanism for option pricing in incomplete markets. We also show that the unique Kelly indifference price results in market equilibrium in the sense that no Kelly trader can improve the magnitude of his instantaneous Sharpe ratio, by trading the derivative, given the actions of the other market participants.
| Original language | English |
|---|---|
| Pages (from-to) | 987-1006 |
| Number of pages | 20 |
| Journal | Journal of Futures Markets |
| Volume | 41 |
| Issue number | 7 |
| Early online date | 2021 May 4 |
| DOIs | |
| Publication status | Published - 2021 Jul 1 |
Subject classification (UKÄ)
- Economics
Free keywords
- Hansen–Jagannathan bound
- incomplete markets
- Kelly indifference price
- minimal martingale measure
- option pricing
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