Skip to main content
Article thumbnail
Location of Repository

Valuation and Martingale properties of shadow prices

By Lucien Foldes

Abstract

Concepts of asset valuation based on the martingale properties of shadow (or marginal utility) prices in continuous-time, infinite-horizon stochastic models of optimal saving and portfolio choice are reviewed and compared with their antecedents in static or deterministic economic theory. Applications of shadow pricing to valuation are described, including a new derivation of the Black-Scholes formula and a generalised net present value formula for valuing an indivisible project yielding a random income. Some new results are presented concerning (I) the characterisation of an optimum in a model of saving with an exogenous random income and (ii) the use of random time transforms to replace local by true martingales in the martingale and transversality conditions for optimal saving and portfolio choice

Topics: HB Economic Theory, QA Mathematics
Publisher: Financial Markets Group, London School of Economics and Political Science
Year: 2000
OAI identifier: oai:eprints.lse.ac.uk:5139
Provided by: LSE Research Online
Download PDF:
Sorry, we are unable to provide the full text but you may find it at the following location(s):
  • http://fmg.lse.ac.uk (external link)
  • http://eprints.lse.ac.uk/5139/ (external link)
  • Suggested articles


    To submit an update or takedown request for this paper, please submit an Update/Correction/Removal Request.