Prices of State-Contingent Claims Implicit in Option Prices

@article{Breeden1978PricesOS,
  title={Prices of State-Contingent Claims Implicit in Option Prices},
  author={Douglas T. Breeden and Robert H. Litzenberger},
  journal={The Wharton School},
  year={1978}
}
This paper implements the time-state preference model in a multi-period economy, deriving the prices of primitive securities from the prices of call options on aggregate consumption. These prices permit an equilibrium valuation of assets with uncertain payoffs at many future dates. Furthermore, for any given portfolio, the price of a $1.00 claim received at a future date, if the portfolio's value is between two given levels at that time, is derived explicitly from a second partial derivative of… 
View on SSRN
static.secure.website
2,232 Citations
Highly Influential Citations
341
Background Citations
815
Methods Citations
449
Results Citations
56

2,232 Citations

Asset Prices in an Exchange Economy with Money and Trade
We show, in an exchange economy with liquidity constraints, that state prices in a complete markets general equilibrium are a function of the supply of liquidity by the Central Bank. Our model is…
Intertemporal asset pricing theory
This is a survey of the basic theoretical foundations of intertemporal asset pricing theory. The broader theory is first reviewed in a simple discrete-time setting, emphasizing the key role of state…
Chapter 11 Intertemporal asset pricing theory
State prices, liquidity, and default
We show, in a monetary exchange economy, that asset prices in a complete markets general equilibrium are a function of the supply of liquidity by the Central Bank, through its effect on default and…
On Equilibrium Asset Price Processes
In this article we derive necessary and sufficient conditions that must be satisfied by equilibrium asset price processes in apure exchange economy. We examine a world in which asset prices follow a…
A General Equilibrium Analysis of Option and Stock Market Interactions
The traditional pricing methodology in finance values derivative securities as redundant assets that have no impact on equilibrium prices and allocations. This paper demonstrates that, when the…
Endogenous State Prices and the Yield Curve
We show, in a general equilibrium model with liquidity constraints, that state prices in a complete market are a function of the supply of liquidity by the Central Bank. In our model, derived along…
Equilibrium Forward Curves for Commodities
We develop an equilibrium model of the term structure of forward prices for storable commodities. As a consequence of a nonnegativity constraint on inventory, the spot commodity has an embedded…
Futures Markets and Commodity Options: Hedging and Optimality in Incomplete Markets
Consumption and Portfolio Choice with Option-Implied State Prices
We propose an empirical implementation of the consumption-investment problem using the martingale representation alternative to dynamic programming. Our method is based on the direct observation of…
...
...

References

SHOWING 1-10 OF 38 REFERENCES
Option pricing: A review
The Pricing of Contingent Claims in Discrete Time Models
return. A risk neutral valuation relationship depends only upon potentially observable parameters and it is extremely significant that such a relationship can be derived from only weak assumptions…
Option pricing when underlying stock returns are discontinuous
An aggregation theorem for securities markets
AN INTERTEMPORAL CAPITAL ASSET PRICING MODEL
An intertemporal model for the capital market is deduced from the portfolio selection behavior by an arbitrary number of investors who aot so as to maximize the expected utility of lifetime…
STANDARD DEVIATIONS OF STOCK PRICE RATIOS IMPLIED IN OPTION PRICES
THE OPTION PRICING MODEL derived by Black and Scholes (B-S) is a path breaking work in the area of contingent claim pricing. Of the five variables which are necessary to specify the model, all are…
The Pricing of Options and Corporate Liabilities
If options are correctly priced in the market, it should not be possible to make sure profits by creating portfolios of long and short positions in options and their underlying stocks. Using this…
THE VALUATION OF RISK ASSETS AND THE SELECTION OF RISKY INVESTMENTS IN STOCK PORTFOLIOS AND CAPITAL BUDGETS
Prices for State-contingent Claims: Some Estimates and Applications
In this paper, we present an approach to investment decisions under uncertainty that we hope will interest both business managers seeking to improve the efficiency of internal capital budgeting…
The Valuation of Uncertain Income Streams and the Pricing of Options
A simple formula is developed for the valuation of uncertain income streams consistent with rational investor behavior and equilibrium in financial markets. Applying this formula to the pricing of an…
...
...