Kelly trading and option pricing
(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.
Please use this url to cite or link to this publication:
https://lup.lub.lu.se/record/4180e99e-e14b-44dc-b349-c9131a80eed4
- author
- Bermin, Hans Peter LU and Holm, Magnus
- organization
- publishing date
- 2021-07-01
- 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}}, }