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When are path-dependent payoffs suboptimal?

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  • Kassberger, Stefan
  • Liebmann, Thomas

Abstract

Generalizing a result by Cox and Leland (2000) and Vanduffel et al. (2009), this note shows that risk-averse investors with fixed planning horizon prefer path-independent payoffs in any financial market if the pricing kernel is a function of the underlying’s price at the end of the planning horizon. Generally, for every payoff which is not a function of the pricing kernel, there is a more attractive alternative that depends solely on the pricing kernel at the end of the planning horizon.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Banking & Finance.

Volume (Year): 36 (2012)
Issue (Month): 5 ()
Pages: 1304-1310

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Handle: RePEc:eee:jbfina:v:36:y:2012:i:5:p:1304-1310

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Web page: http://www.elsevier.com/locate/jbf

Related research

Keywords: Path dependence; Optimal payoff; Risk aversion; Esscher transform;

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  1. Cox, John C. & Leland, Hayne E., 2000. "On dynamic investment strategies," Journal of Economic Dynamics and Control, Elsevier, vol. 24(11-12), pages 1859-1880, October.
  2. Jeroen V.K. Rombouts & Lars Stentoft, 2010. "Multivariate Option Pricing with Time Varying Volatility and Correlations," Cahiers de recherche 1020, CIRPEE.
  3. Wong, Hoi Ying & Guan, Peiqiu, 2011. "An FFT-network for Lévy option pricing," Journal of Banking & Finance, Elsevier, vol. 35(4), pages 988-999, April.
  4. Fajardo, José & Farias, Aquiles, 2010. "Derivative pricing using multivariate affine generalized hyperbolic distributions," Journal of Banking & Finance, Elsevier, vol. 34(7), pages 1607-1617, July.
  5. Mansuy, Roger & Yor, Marc, 2005. "Harnesses, Lévy bridges and Monsieur Jourdain," Stochastic Processes and their Applications, Elsevier, vol. 115(2), pages 329-338, February.
  6. Shin Kim, Young & Rachev, Svetlozar T. & Leonardo Bianchi, Michele & Fabozzi, Frank J., 2010. "Tempered stable and tempered infinitely divisible GARCH models," Journal of Banking & Finance, Elsevier, vol. 34(9), pages 2096-2109, September.
  7. Denuit Michel & Dhaene Jan & Goovaerts Marc & Kaas Rob & Laeven Roger, 2006. "Risk measurement with equivalent utility principles," Statistics & Risk Modeling, De Gruyter, vol. 24(1/2006), pages 25, July.
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