CHOQUET PRICING FOR FINANCIAL MARKETS WITH FRICTIONS¹

Abstract

In markets where dealers play a central role, bid‐ask spreads inhibit asset valuation as defined by the formation cost of a replicating portfolio. We introduce a nonlinear valuation formula similar to the usual expectation with respect to the risk‐adjusted probability measure. This formula expresses the asset's selling and buying prices set by dealers as the Choquet integrals of their random payoffs We investigate several price puzzles: the violation of the put‐call parity and the fact that the components of a security can sell at a premium to the underlying security (primes and scores).