An Extension of Good-Deal Asset Price Bounds
In a two-period setup we develop a generalization of good-deal bounds that allows to include in the problem the implications of asset pricing models. Our basis is the distance behind Hansen and Jagannathan's measure of model misspecification since a volatility constraint on the stochastic discount factor is a particular case of a restriction on this distance. We also present an alternative approach which mostly retains the economic interpretation underlying the above extension and it has a very useful property since the resulting bounds can be computed by simply solving a linear program.
|Date of creation:||21 May 2001|
|Date of revision:||19 Oct 2001|
|Note:||The previous version of this working paper had the title "A New Approach to the Derivation of Asset Price Bounds".|
|Contact details of provider:|| Postal: The Economic Research Institute, Stockholm School of Economics, P.O. Box 6501, 113 83 Stockholm, Sweden|
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