| Summary: | This paper explores the pricing of a new asset in a hierarchical segmented
market. Motivated by the idea of projection pricing in an integrated market,
we develop formulas for pricing in segmented markets that utilize
existing pricing information. We develop the
fundamental structure of an appropriate segmentation pricing formula for a
new asset. Furthermore, we show that the simple concept of projection
pricing does not generalize in a completely satisfactory manner to segmented
markets. However, we are able to develop a formula under a CARA utility function and
Gaussian payoffs that fully incorporates existing information.
These ideas are illustrated through
a simple continuous time model of an IPO. |
