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Pricing and hedging in incomplete markets with coherent risk

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  • Alexander S. Cherny
  • Dilip B. Madan

Abstract

We propose a pricing technique based on coherent risk measures, which enables one to get finer price intervals than in the No Good Deals pricing. The main idea consists in splitting a liability into several parts and selling these parts to different agents. The technique is closely connected with the convolution of coherent risk measures and equilibrium considerations. Furthermore, we propose a way to apply the above technique to the coherent estimation of the Greeks.

Suggested Citation

  • Alexander S. Cherny & Dilip B. Madan, 2006. "Pricing and hedging in incomplete markets with coherent risk," Papers math/0605064, arXiv.org.
    • Handle: RePEc:arx:papers:math/0605064
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    Cited by:

    1. Stelios Bekiros & Nikolaos Loukeris & Iordanis Eleftheriadis & Christos Avdoulas, 2019. "Tail-Related Risk Measurement and Forecasting in Equity Markets," Computational Economics, Springer;Society for Computational Economics, vol. 53(2), pages 783-816, February.
    2. Tomasz R. Bielecki & Igor Cialenco & Ismail Iyigunler & Rodrigo Rodriguez, 2013. "Dynamic Conic Finance: Pricing And Hedging In Market Models With Transaction Costs Via Dynamic Coherent Acceptability Indices," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 16(01), pages 1-36.
    3. Tomasz R. Bielecki & Igor Cialenco & Marcin Pitera, 2016. "A survey of time consistency of dynamic risk measures and dynamic performance measures in discrete time: LM-measure perspective," Papers 1603.09030, arXiv.org, revised Jan 2017.
    4. Tomasz R. Bielecki & Igor Cialenco & Ismail Iyigunler & Rodrigo Rodriguez, 2012. "Dynamic Conic Finance: Pricing and Hedging in Market Models with Transaction Costs via Dynamic Coherent Acceptability Indices," Papers 1205.4790, arXiv.org, revised Jun 2013.

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