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Towards a General Theory of Good Deal Bounds

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  • Björk, Tomas

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

  • Slinko, Irina

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

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    Abstract

    We consider an incomplete market in the form of a multidimensional Markovian factor model, driven by a general marked point process (representing discrete jump events) as well as by a standard multidimensional Wiener process. Within this framework we study arbitrage free good deal pricing bounds for derivative assets along the lines of Cochrane and Saa-Requejo, extending the CSR results to the point process case. As a concrete application we present numerical results for the classic Merton jump-diffusion model. As a by product of the general theory we also extend the Hansen-Jagannathan bounds for the Sharpe Ratio to the point process setting.

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    File URL: http://swopec.hhs.se/hastef/papers/hastef0595.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 595.

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    Length: 35 pages
    Date of creation: 03 Feb 2004
    Date of revision:
    Handle: RePEc:hhs:hastef:0595

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    Related research

    Keywords: Incomplete markets; good deal bounds; financial derivatives; arbitrage pricing;

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    1. Lars Peter Hansen & Ravi Jagannathan, 1990. "Implications of Security Market Data for Models of Dynamic Economies," NBER Technical Working Papers 0089, National Bureau of Economic Research, Inc.
    2. Merton, Robert C., 1975. "Option pricing when underlying stock returns are discontinuous," Working papers 787-75., Massachusetts Institute of Technology (MIT), Sloan School of Management.
    3. John H. Cochrane & Jesus Saa-Requejo, 2000. "Beyond Arbitrage: Good-Deal Asset Price Bounds in Incomplete Markets," Journal of Political Economy, University of Chicago Press, vol. 108(1), pages 79-119, February.
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