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Towards a General Theory of Good-Deal Bounds

  • Tomas Björk
  • Irina Slinko
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    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 gooddeal pricing bounds for derivative assets, thereby extending the results by Cochrane and Saá Requejo (2000) to the point process case, while, at the same time, obtaining a radical simplification of the theory. To illustrate, we present numerical results for the classic Merton jump-diffusion model. As a by-product of the general theory, we derive extended Hansen-Jagannathan bounds for the Sharpe Ratio process in the point process setting. Copyright 2006, Oxford University Press.

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    Article provided by European Finance Association in its journal Review of Finance.

    Volume (Year): 10 (2006)
    Issue (Month): 2 ()
    Pages: 221-260

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    Handle: RePEc:oup:revfin:v:10:y:2006:i:2:p:221-260
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