CAPM-like formulae and good deal absence with ambiguous setting and coherent risk measure
AbstractRisk measures beyond the variance have shown theoretical advantages when addressing some classical problems of Financial Economics, at least if asymmetries and/or heavy tails are involved. Nevertheless, in portfolio selection they have provoked several caveats such as the existence of good deals in most of the arbitrage free pricing models. In other words, models such as Black and Scholes or Heston allow investors to build sequences of strategies whose expected return tends to in nite and whose risk remains bounded or tends to minus in nite. This paper studies whether this drawback still holds if the investor is facing the presence of multiple priors, as well as the properties of optimal portfolios in a good deal free ambiguous framework. With respect to the rst objective, we show that there are four possible results. If the investor uncertainty is too high he/she has no incentives to buy risky assets. As the uncertainty (set of priors) decreases the interest in risky securities increases. If her/his uncertainty becomes too low then two types of good deal may arise. Consequently, there is a very important di¤erence between the ambiguous and the non ambiguous setting. Under ambiguity the investor uncertainty may increase in such a manner that the model becomes good deal free and presents a market price of risk as close as possible to that re ected by the investor empirical evidence. Hence, ambiguity may help to overcome some meaningless ndings in asset pricing. With respect to our second objective, good deal free ambiguous models imply the existence of a benchmark generating a robust capital market line. The robust (worst-case) risk of every strategy may be divided into systemic and speci c, and no robust return is paid by the speci c robust risk. A couple of betas may be associated with every strategy, and extensions of the CAPM most important formulas will be proved.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by Universidad Carlos III, Instituto sobre Desarrollo Empresarial "Carmen Vidal Ballester" in its series Business Economics Working Papers with number id-11-04.
Date of creation: Apr 2011
Date of revision:
Contact details of provider:
Postal: Edificio "Normante", Despacho 6.0.27, Avd. de Madrid, 126, 28903, Getafe (Madrid)
Web page: http://www.uc3m.es/portal/page/portal/inst_desarr_empres_carmen_vidal_ballester
More information through EDIRC
Ambiguity; Conditional value at risk; Good deal; CAPM;
Find related papers by JEL classification:
- G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
- G12 - Financial Economics - - General Financial Markets - - - Asset Pricing
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Fabio Maccheroni & Massimo Marinacci & Aldo Rustichini, 2004.
"Ambiguity Aversion, Robustness, and the Variational Representation of Preferences,"
Carlo Alberto Notebooks
12, Collegio Carlo Alberto, revised 2006.
- Fabio Maccheroni & Massimo Marinacci & Aldo Rustichini, 2006. "Ambiguity Aversion, Robustness, and the Variational Representation of Preferences," Econometrica, Econometric Society, vol. 74(6), pages 1447-1498, November.
- Balbás, Alejandro & Balbás, Beatriz & Balbás, Raquel, 2010. "Minimizing measures of risk by saddle point conditions," Open Access publications from Universidad Carlos III de Madrid info:hdl:10016/12974, Universidad Carlos III de Madrid.
- Larry G. Epstein & Martin Schneider, 2008.
"Ambiguity, Information Quality, and Asset Pricing,"
Journal of Finance,
American Finance Association, vol. 63(1), pages 197-228, 02.
- Larry Epstein & Martin Schneider, 2004. "Ambiguity, Information Quality and Asset Pricing," RCER Working Papers 507, University of Rochester - Center for Economic Research (RCER).
- Larry Epstein & Martin Schneider, 2005. "Ambiguity, Information Quality and Asset Pricing," RCER Working Papers 519, University of Rochester - Center for Economic Research (RCER).
- Gilboa, Itzhak & Schmeidler, David, 1989. "Maxmin expected utility with non-unique prior," Journal of Mathematical Economics, Elsevier, vol. 18(2), pages 141-153, April.
- Garlappi, Lorenzo & Uppal, Raman & Wang, Tan, 2005.
"Portfolio Selection with Parameter and Model Uncertainty: A Multi-Prior Approach,"
CEPR Discussion Papers
5148, C.E.P.R. Discussion Papers.
- Lorenzo Garlappi & Raman Uppal & Tan Wang, 2007. "Portfolio Selection with Parameter and Model Uncertainty: A Multi-Prior Approach," Review of Financial Studies, Society for Financial Studies, vol. 20(1), pages 41-81, January.
- Raman Uppal & Lorenzo Garlappi & Tan Wang, 2004. "Portfolio Selection with Parameter and Model Uncertainty: A Multi-Prior Approach," Money Macro and Finance (MMF) Research Group Conference 2004 54, Money Macro and Finance Research Group.
- Garlappi, Lorenzo & Uppal, Raman & Wang, Tan, 2005. "Portfolio Selection with Parameter and Model Uncertainty: A Multi-Prior Approach," CEPR Discussion Papers 5041, C.E.P.R. Discussion Papers.
- Dean P. Foster & Sergiu Hart, 2009.
"An Operational Measure of Riskiness,"
Journal of Political Economy,
University of Chicago Press, vol. 117(5), pages 785 - 814.
- Dean P. Foster & Sergiu Hart, 2007. "An Operational Measure of Riskiness," Discussion Paper Series dp454, The Center for the Study of Rationality, Hebrew University, Jerusalem.
- Dean Foster & Sergiu Hart, 2007. "An Operational Measure of Riskiness," Levine's Bibliography 843644000000000095, UCLA Department of Economics.
- Vikas Agarwal, 2004. "Risks and Portfolio Decisions Involving Hedge Funds," Review of Financial Studies, Society for Financial Studies, vol. 17(1), pages 63-98.
- Philippe Artzner & Freddy Delbaen & Jean-Marc Eber & David Heath, 1999. "Coherent Measures of Risk," Mathematical Finance, Wiley Blackwell, vol. 9(3), pages 203-228.
- Goovaerts, Marc J. & Kaas, Rob & Dhaene, Jan & Tang, Qihe, 2004. "Some new classes of consistent risk measures," Insurance: Mathematics and Economics, Elsevier, vol. 34(3), pages 505-516, June.
- Peter Bossaerts & Paolo Ghirardato & Serena Guarnaschelli & William R. Zame, 2010.
"Ambiguity in Asset Markets: Theory and Experiment,"
Review of Financial Studies,
Society for Financial Studies, vol. 23(4), pages 1325-1359, April.
- Turan G. Bali & Nusret Cakici & Fousseni Chabi-Yo, 2011. "A Generalized Measure of Riskiness," Management Science, INFORMS, vol. 57(8), pages 1406-1423, August.
- H. Henry Cao & Tan Wang & Harold H. Zhang, 2005. "Model Uncertainty, Limited Market Participation, and Asset Prices," Review of Financial Studies, Society for Financial Studies, vol. 18(4), pages 1219-1251.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ().
If references are entirely missing, you can add them using this form.