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Beyond Arbitrage: "Good-Deal" Asset Price Bounds in Incomplete Markets

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  • JOHN H. COCHRANE
  • JESÚS SAÁ-REQUEJO

Abstract

It is often useful to price assets and other random payoffs by reference to other observed prices rather than construct full-fledged economic asset pricing models. This approach breaks down if one cannot find a perfect replicating portfolio. We impose weak economic restrictions to derive usefully tight bounds on asset prices in this situation. The bounds basically rule out high Sharpe ratios - `good deals' - as well as arbitrage opportunities. We present the method of calculation, we extend it to a multiperiod context by finding a recursive solution, and we apply it to option pricing examples including the Black-Scholes setup with infrequent trading, and a model with stochastic stock volatility and a varying riskfree rate.
(This abstract was borrowed from another version of this item.)
(This abstract was borrowed from another version of this item.)
(This abstract was borrowed from another version of this item.)

Suggested Citation

  • John H. Cochrane & Jesús Saá-Requejo, 1998. "Beyond Arbitrage: "Good-Deal" Asset Price Bounds in Incomplete Markets," CRSP working papers 430, Center for Research in Security Prices, Graduate School of Business, University of Chicago.
    • Handle: RePEc:wop:chispw:430
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    References listed on IDEAS

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