Abstract
This paper presents a novel Monte Carlo method for option pricing that is based on a general equilibrium model. The advantage of the method compared to the standard risk-neutral pricing approach is that it does not require the specification of a market price of risk, making the method particularly suitable for pricing in incomplete markets. The method produces a strongly consistent estimator for the option price which exhibits the same error convergence rate as the standard risk-neutral pricing Monte Carlo approach. For illustration, the procedure is applied to the pricing of options under stochastic volatility.
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