Towards a General Theory of Good Deal Bounds
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 good deal pricing bounds for derivative assets along the lines of Cochrane and Saa-Requejo, extending the CSR results to the point process case. As a concrete application we present numerical results for the classic Merton jump-diffusion model. As a by product of the general theory we also extend the Hansen-Jagannathan bounds for the Sharpe Ratio to the point process setting.
|Date of creation:||03 Feb 2004|
|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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- Lars Peter Hansen & Ravi Jagannathan, 1990.
"Implications of security market data for models of dynamic economies,"
Discussion Paper / Institute for Empirical Macroeconomics
29, Federal Reserve Bank of Minneapolis.
- Hansen, Lars Peter & Jagannathan, Ravi, 1991. "Implications of Security Market Data for Models of Dynamic Economies," Journal of Political Economy, University of Chicago Press, vol. 99(2), pages 225-262, April.
- Lars Peter Hansen & Ravi Jagannathan, 1990. "Implications of Security Market Data for Models of Dynamic Economies," NBER Technical Working Papers 0089, National Bureau of Economic Research, Inc.
- Merton, Robert C., 1976.
"Option pricing when underlying stock returns are discontinuous,"
Journal of Financial Economics,
Elsevier, vol. 3(1-2), pages 125-144.
- Merton, Robert C., 1975. "Option pricing when underlying stock returns are discontinuous," Working papers 787-75., Massachusetts Institute of Technology (MIT), Sloan School of Management.
- John H. Cochrane & Jesus Saa-Requejo, 2000.
"Beyond Arbitrage: Good-Deal Asset Price Bounds in Incomplete Markets,"
Journal of Political Economy,
University of Chicago Press, vol. 108(1), pages 79-119, February.
- John H. Cochrane & Jesús Saá-Requejo, 1998. "Beyond Arbitrage: "Good-Deal" Asset Price Bounds in Incomplete Markets," CRSP working papers 430, Center for Research in Security Prices, Graduate School of Business, University of Chicago.
- John H. Cochrane & Jesus Saa-Requejo, 1996. "Beyond Arbitrage: "Good-Deal" Asset Price Bounds in Incomplete Markets," NBER Working Papers 5489, National Bureau of Economic Research, Inc.
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