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Coherent Acceptability Measures In Multiperiod Models

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  • Berend Roorda
  • J. M. Schumacher
  • Jacob Engwerda

Abstract

The framework of coherent risk measures has been introduced by Artzner et al. (1999; Math. Finance 9, 203–228) in a single‐period setting. Here, we investigate a similar framework in a multiperiod context. We add an axiom of dynamic consistency to the standard coherence axioms, and obtain a representation theorem in terms of collections of multiperiod probability measures that satisfy a certain product property. This theorem is similar to results obtained by Epstein and Schneider (2003; J. Econ. Theor. 113, 1–31) and Wang (2003; J. Econ. Theor. 108, 286–321) in a different axiomatic framework. We then apply our representation result to the pricing of derivatives in incomplete markets, extending results by Carr, Geman, and Madan (2001; J. Financial Econ. 32, 131–167) to the multiperiod case. We present recursive formulas for the computation of price bounds and corresponding optimal hedges. When no shortselling constraints are present, we obtain a recursive formula for price bounds in terms of martingale measures.

Suggested Citation

  • Berend Roorda & J. M. Schumacher & Jacob Engwerda, 2005. "Coherent Acceptability Measures In Multiperiod Models," Mathematical Finance, Wiley Blackwell, vol. 15(4), pages 589-612, October.
    • Handle: RePEc:bla:mathfi:v:15:y:2005:i:4:p:589-612
    DOI: 10.1111/j.1467-9965.2005.00252.x
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