Good Deals and compatible modification of risk and pricing rule: a regulatory treatment
AbstractThis work studies Good Deals in a scenario in which a fir uses decision-making tools based on a coherent risk measure, and in which the market prices are determined with a sub-linear pricing rule. The most important observation of this work is that the existence of a Good Deal is equivalent to the incompatibility between the pricing rule and the risk measure. In this paper, we look into this situation from a regulatory point of view to rule out Good Deals with the purpose of stabilizing financia markets. We propose some practical ways of modifying a risk measure so a regulator can set appropriate levels of capital requirements for a financia institution.
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Bibliographic InfoPaper provided by Universidad Carlos III de Madrid in its series Open Access publications from Universidad Carlos III de Madrid with number info:hdl:10016/12967.
Length: 270 p.
Date of creation: May 2011
Date of revision:
Publication status: Published in Mathematics and Financial Economics (2011-05) v.v. 4, p.253-268
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Web page: http://www.uc3m.es
Coherent risk measures; Princing rule; Good deal; Compatibility;
Find related papers by JEL classification:
- C02 - Mathematical and Quantitative Methods - - General - - - Mathematical Economics
- G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
This paper has been announced in the following NEP Reports:
- NEP-ALL-2012-01-25 (All new papers)
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