Title: Non-arbitrage valuation of equities

Authors: Sebastián A. Rey

Addresses: Centro de Investigación en Métodos Cuantitativos Aplicados a la Economía y la Gestión, Facultad de Ciencias Económicas, Universidad de Buenos Aires, Av. Córdoba 2122 (C1120AAQ), Ciudad de Buenos Aires, Argentina

Abstract: This paper develops a framework for the valuation of equities under non-arbitrage conditions. The original contribution is that, in contrast with the traditional models (equilibrium models), the presented approach is derived using non-arbitrage arguments, commonly used for derivatives pricing. The method consists in analysing the non-arbitrage value of the equity of a company, that is assumed to be the sum of the non-arbitrage value of dividends, individually considered as (path-dependent European type) financial derivatives. A relevant characteristic of the presented approach is that the setting of subjective assumptions would be significantly reduced.

Keywords: equities valuation; non-arbitrage pricing; market price of risk; path-dependent derivatives; financial derivatives.

DOI: 10.1504/IJFMD.2015.073472

International Journal of Financial Markets and Derivatives, 2015 Vol.4 No.3/4, pp.231 - 245

Received: 20 May 2015
Accepted: 28 Jul 2015
Published online: 09 Dec 2015 *

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