Regulatory-Compliant Derivatives Pricing is Not Risk-Neutral
AbstractRegulations impose idiosyncratic capital and funding costs for holding derivatives. Capital requirements are costly because derivatives desks are risky businesses; funding is costly in part because regulations increase the minimum funding tenor. Idiosyncratic costs mean no single measure makes derivatives martingales for all market participants. Hence Regulatory-compliant pricing is not risk-neutral. This has implications for exit prices and mark-to-market.
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Bibliographic InfoPaper provided by arXiv.org in its series Papers with number 1311.0118.
Date of creation: Nov 2013
Date of revision: Aug 2014
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Web page: http://arxiv.org/
This paper has been announced in the following NEP Reports:
- NEP-ALL-2013-11-14 (All new papers)
- NEP-BAN-2013-11-14 (Banking)
- NEP-FMK-2013-11-14 (Financial Markets)
- NEP-RMG-2013-11-14 (Risk Management)
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- Hiroaki Kaido & Halbert White, 2009. "Inference on Risk-Neutral Measures for Incomplete Markets," Journal of Financial Econometrics, Society for Financial Econometrics, vol. 7(3), pages 199-246, Summer.
- Tuckman, Bruce & Vila, Jean-Luc, 1992. " Arbitrage with Holding Costs: A Utility-Based Approach," Journal of Finance, American Finance Association, vol. 47(4), pages 1283-302, September.
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