No Good Deals - No Bad Models
AbstractFaced with the problem of pricing complex contingent claims, an investor seeks to make his valuations robust to model uncertainty. We construct a notion of a model- uncertainty-induced utility function and show that model uncertainty increases the investor's effective risk aversion. Using the model-uncertainty-induced utility function, we extend the "No Good Deals" methodology of Cochrane and Saa-Requejo  to compute lower and upper good deal bounds in the presence of model uncertainty. We illustrate the methodology using some numerical examples.
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Bibliographic InfoPaper provided by Business School - Economics, University of Glasgow in its series Working Papers with number 2013_04.
Date of creation: Jan 2013
Date of revision:
Asset pricing theory; Good deal bounds; Knightian uncertainty; Model uncertainty; Contingent claim pricing. model-uncertainty-induced utility function;
Other versions of this item:
- G12 - Financial Economics - - General Financial Markets - - - Asset Pricing
- G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
This paper has been announced in the following NEP Reports:
- NEP-ALL-2013-03-02 (All new papers)
- NEP-HPE-2013-03-02 (History & Philosophy of Economics)
- NEP-MIC-2013-03-02 (Microeconomics)
- NEP-UPT-2013-03-02 (Utility Models & Prospect Theory)
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