BFS 2002

Contributed Talk

Asset pricing using a form of evolution

Rimas Norvaisa

There are two basic questions in the asset pricing theory of financial mathematics. The first question is how to price primitives (e.g. risky stocks} and the second one is how to price derivatives (e.g. options). In the semimartingale theory based financial mathematics primitives are treated as solutions of stochastic differential equations with respect to semimartingales. This method of pricing is backed by using arguments based on various forms of the efficient market hypothesis. In the talk we present alternative arguments leading to pricing of primitives using a solution of the evolution representation problem. The resulting model of pricing of primitives includes the semimartingale based pricing in a different (pathwise) form.
Also, in the talk we mention two other questions in the context of our model:
(1) a relation between discrete and continuous time models, and
(2) pricing of derivatives.