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Kelly trading and option pricing

Bermin, Hans Peter LU and Holm, Magnus (2021) In Journal of Futures Markets 41(7). p.987-1006
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.

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author
and
organization
publishing date
type
Contribution to journal
publication status
published
subject
keywords
Hansen–Jagannathan bound, incomplete markets, Kelly indifference price, minimal martingale measure, option pricing
in
Journal of Futures Markets
volume
41
issue
7
pages
20 pages
publisher
John Wiley & Sons Inc.
external identifiers
  • scopus:85105019156
ISSN
0270-7314
DOI
10.1002/fut.22210
language
English
LU publication?
yes
id
4180e99e-e14b-44dc-b349-c9131a80eed4
date added to LUP
2021-05-17 11:43:29
date last changed
2022-04-27 01:58:00
@article{4180e99e-e14b-44dc-b349-c9131a80eed4,
  abstract     = {{<p>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.</p>}},
  author       = {{Bermin, Hans Peter and Holm, Magnus}},
  issn         = {{0270-7314}},
  keywords     = {{Hansen–Jagannathan bound; incomplete markets; Kelly indifference price; minimal martingale measure; option pricing}},
  language     = {{eng}},
  month        = {{07}},
  number       = {{7}},
  pages        = {{987--1006}},
  publisher    = {{John Wiley & Sons Inc.}},
  series       = {{Journal of Futures Markets}},
  title        = {{Kelly trading and option pricing}},
  url          = {{http://dx.doi.org/10.1002/fut.22210}},
  doi          = {{10.1002/fut.22210}},
  volume       = {{41}},
  year         = {{2021}},
}