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Narrowing the No-Arbitrage Bounds

  • Robert G. Chambers


    (Dept of Agricultural and Resource Economics, University of Maryland, College Park)

  • John Quiggin


    (Department of Economics, University of Queensland)

The broadness of no-arbitrage bounds on asset prices has led to a number of suggestions on how to narrow them. This paper points out that another, apparently unexploited, opportunity exists for narrowing the no-arbitrage bounds, using information on the production technology. The key analytic concept is that of the derivative-cost function, which is used to define a notion of arbitrage that encompasses both the basis assets and stochastic production opportunities.

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Paper provided by Risk and Sustainable Management Group, University of Queensland in its series Risk & Uncertainty Working Papers with number WPR03_3.

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Handle: RePEc:rsm:riskun:r03_3
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  1. Hansen, Lars Peter & Jagannathan, Ravi, 1997. " Assessing Specification Errors in Stochastic Discount Factor Models," Journal of Finance, American Finance Association, vol. 52(2), pages 557-90, June.
  2. Ross, Stephen A., 1976. "The arbitrage theory of capital asset pricing," Journal of Economic Theory, Elsevier, vol. 13(3), pages 341-360, December.
  3. Chambers, Robert G. & Quiggin, John, 2009. "Separability of stochastic production decisions from producer risk preferences in the presence of financial markets," Journal of Mathematical Economics, Elsevier, vol. 45(11), pages 730-737, December.
  4. Estrella, Arturo & Hardouvelis, Gikas A, 1991. " The Term Structure as a Predictor of Real Economic Activity," Journal of Finance, American Finance Association, vol. 46(2), pages 555-76, June.
  5. Cochrane, John H, 1996. "A Cross-Sectional Test of an Investment-Based Asset Pricing Model," Journal of Political Economy, University of Chicago Press, vol. 104(3), pages 572-621, June.
  6. 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 225-62, April.
  7. Chambers,Robert G. & Quiggin,John, 2000. "Uncertainty, Production, Choice, and Agency," Cambridge Books, Cambridge University Press, number 9780521785235, October.
  8. Dreze, Jacques H, 1985. "(Uncertainty and) the Firm in General Equilibrium Theory," Economic Journal, Royal Economic Society, vol. 95(380a), pages 1-20, Supplemen.
  9. Kallal, Hedi & Jouini, Elyès, 1995. "Martingales and arbitrage in securities markets with transaction costs," Economics Papers from University Paris Dauphine 123456789/5630, Paris Dauphine University.
  10. Jermann, Urban J., 1998. "Asset pricing in production economies," Journal of Monetary Economics, Elsevier, vol. 41(2), pages 257-275, April.
  11. TallariniJr., Thomas D., 2000. "Risk-sensitive real business cycles," Journal of Monetary Economics, Elsevier, vol. 45(3), pages 507-532, June.
  12. Chambers, Robert G & Quiggin, John, 2003. "Dual structures for the sole-proprietorship firm," Risk and Sustainable Management Group Working Papers 150352, University of Queensland, School of Economics.
  13. Ross, Stephen A, 1978. "A Simple Approach to the Valuation of Risky Streams," The Journal of Business, University of Chicago Press, vol. 51(3), pages 453-75, July.
  14. Clark, Stephen A., 1993. "The valuation problem in arbitrage price theory," Journal of Mathematical Economics, Elsevier, vol. 22(5), pages 463-478.
  15. repec:fth:inseep:9513 is not listed on IDEAS
  16. Ross, Stephen A, 1987. "Arbitrage and Martingales with Taxation," Journal of Political Economy, University of Chicago Press, vol. 95(2), pages 371-93, April.
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