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No Good Deals - No Bad Models

  • Nina, Boyarchenko
  • Mario, Cerrato
  • John, Crosby
  • Stewart, Hodges

Faced with the problem of pricing complex contingent claims, an investor seeks to make his valuations robust to model uncertainty. We construct a notion of a model- uncertainty-induced utility function and show that model uncertainty increases the investor's eff ective risk aversion. Using the model-uncertainty-induced utility function, we extend the \No Good Deals" methodology of Cochrane and Sa a-Requejo [2000] to compute lower and upper good deal bounds in the presence of model uncertainty. We illustrate the methodology using some numerical examples.

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File URL: http://hdl.handle.net/10943/452
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Paper provided by Scottish Institute for Research in Economics (SIRE) in its series SIRE Discussion Papers with number 2013-20.

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Date of creation: 2013
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Handle: RePEc:edn:sirdps:452
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