Abstract.
We consider a general model for an investment producing a single commodity, and, assuming that there exists a traded asset spanning the corresponding market, we prove a “verification theorem” which relates the solution of an appropriate differential equation with the investment's contingent claim price. In this way, we show in a mathematically rigorous way that the contingent claim approach and the dynamic programming approach to the problem of asset valuation are equivalent, modulo parameter calibration. Our analysis can be used in a straightforward way to address a big number of investment models.
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Manuscript received: October 1997; final version received: September 1998
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Knudsen, T., Meister, B. & Zervos, M. On the relationship of the dynamic programming approach and the contingent claim approach to asset valuation. Finance Stochast 3, 433–449 (1999). https://doi.org/10.1007/s007800050070
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DOI: https://doi.org/10.1007/s007800050070