Good deal measurement in asset pricing: Actuarial and financial implications
We will integrate in a single optimization problem a risk measure beyond the variance and either arbitrage free real market quotations or financial pricing rules generated by an arbitrage free stochastic pricing model. A sequence of investment strategies such that the couple (risk; price) diverges to (-∞, -∞) will be called good deal. We will see that good deals often exist in practice, and the paper main objective will be to measure the good deal size. The provided good deal measures will equal an optimal ratio between both risk and price, and there will exist alternative interpretations of these measures. They will also provide the minimum relative (per dollar) price modification that prevents the good deal existence. Moreover, they will be a crucial instrument to detect those securities or marketed claims which are over or under-priced. Many classical actuarial and financial optimization problems may generate wrong solutions if the used market quotations or stochastic pricing models do not prevent the good deal existence. This fact will be illustrated in the paper, and it will be pointed out how the provided good deal measurement may be useful to overcome this caveat. Numerical experiments will be yielded as well.
|Date of creation:||12 Sep 2016|
|Contact details of provider:|| Web page: http://portal.uc3m.es/portal/page/portal/indem|
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- M. B. Haugh & A. W. Lo, 2001. "Asset allocation and derivatives," Quantitative Finance, Taylor & Francis Journals, vol. 1(1), pages 45-72.
- R. Rockafellar & Stan Uryasev & Michael Zabarankin, 2006. "Generalized deviations in risk analysis," Finance and Stochastics, Springer, vol. 10(1), pages 51-74, 01.
- Guan, Guohui & Liang, Zongxia, 2014. "Optimal reinsurance and investment strategies for insurer under interest rate and inflation risks," Insurance: Mathematics and Economics, Elsevier, vol. 55(C), pages 105-115.
- Chen, Zhiwu & Knez, Peter J, 1995. "Measurement of Market Integration and Arbitrage," Review of Financial Studies, Society for Financial Studies, vol. 8(2), pages 287-325.
- Kamara, Avraham & Miller, Thomas W., 1995. "Daily and Intradaily Tests of European Put-Call Parity," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 30(04), pages 519-539, December.
- Kempf, Alexander & Korn, Olaf, 1998. "Trading System and Market Integration," Journal of Financial Intermediation, Elsevier, vol. 7(3), pages 220-239, July.
- Balbás, Alejandro & Balbás, Raquel & Garrido, José, 2010. "Extending pricing rules with general risk functions," European Journal of Operational Research, Elsevier, vol. 201(1), pages 23-33, February.
- Harrison, J. Michael & Kreps, David M., 1979. "Martingales and arbitrage in multiperiod securities markets," Journal of Economic Theory, Elsevier, vol. 20(3), pages 381-408, June.
- Philippe Artzner & Freddy Delbaen & Jean-Marc Eber & David Heath, 1999. "Coherent Measures of Risk," Mathematical Finance, Wiley Blackwell, vol. 9(3), pages 203-228.
- Prisman, Eliezer Z, 1986. " Valuation of Risky Assets in Arbitrage Free Economies with Frictions," Journal of Finance, American Finance Association, vol. 41(3), pages 545-557, July.
- Ballestero, Enrique & Bravo, Mila & Pérez-Gladish, Blanca & Arenas-Parra, Mar & Plà-Santamaria, David, 2012. "Socially Responsible Investment: A multicriteria approach to portfolio selection combining ethical and financial objectives," European Journal of Operational Research, Elsevier, vol. 216(2), pages 487-494.
- Dong-Hyun Ahn & Jacob Boudoukh & Matthew Richardson & Robert F. Whitelaw, 1999. "Optimal Risk Management Using Options," Journal of Finance, American Finance Association, vol. 54(1), pages 359-375, 02.
When requesting a correction, please mention this item's handle: RePEc:cte:idrepe:23546. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Ana Poveda)
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.