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An Extension of Good-Deal Asset Price Bounds

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  • Longarela, Iñaki R.

    ()
    (Dept. of Finance, Stockholm School of Economics)

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    Abstract

    In a two-period setup we develop a generalization of good-deal bounds that allows to include in the problem the implications of asset pricing models. Our basis is the distance behind Hansen and Jagannathan's measure of model misspecification since a volatility constraint on the stochastic discount factor is a particular case of a restriction on this distance. We also present an alternative approach which mostly retains the economic interpretation underlying the above extension and it has a very useful property since the resulting bounds can be computed by simply solving a linear program.

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    File URL: http://swopec.hhs.se/hastef/papers/hastef0448.pdf
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    Bibliographic Info

    Paper provided by Stockholm School of Economics in its series Working Paper Series in Economics and Finance with number 0448.

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    Length: 20 pages
    Date of creation: 21 May 2001
    Date of revision: 19 Oct 2001
    Handle: RePEc:hhs:hastef:0448

    Note: The previous version of this working paper had the title "A New Approach to the Derivation of Asset Price Bounds".
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    Postal: The Economic Research Institute, Stockholm School of Economics, P.O. Box 6501, 113 83 Stockholm, Sweden
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    Related research

    Keywords: generalized good-deal bounds; L1-norm methods;

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    Cited by:
    1. HENROTTE, Philippe, 2002. "Pricing kernels and dynamic portfolios," Les Cahiers de Recherche 768, HEC Paris.

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