1 option
Beyond Arbitrage: "Good-Deal" Asset Price Bounds in Incomplete Markets / John H. Cochrane, Jesus Saa-Requejo.
- Format:
- Book
- Author/Creator:
- Cochrane, John H.
- Series:
- Working Paper Series (National Bureau of Economic Research) no. w5489.
- NBER working paper series no. w5489
- Language:
- English
- Subjects (All):
- Arbitrage.
- Physical Description:
- 1 online resource: illustrations (black and white);
- Other Title:
- Beyond Arbitrage
- Place of Publication:
- Cambridge, Mass. National Bureau of Economic Research 1996.
- Cambridge, Mass. : National Bureau of Economic Research, 1996.
- Summary:
- It is often useful to price assets and other random payoffs by reference to other observed prices rather than construct full-fledged economic asset pricing models. This approach breaks down if one cannot find a perfect replicating portfolio. We impose weak economic restrictions to derive usefully tight bounds on asset prices in this situation. The bounds basically rule out high Sharpe ratios - `good deals' - as well as arbitrage opportunities. We present the method of calculation, we extend it to a multiperiod context by finding a recursive solution, and we apply it to option pricing examples including the Black-Scholes setup with infrequent trading, and a model with stochastic stock volatility and a varying riskfree rate.
- Notes:
- Print version record
- March 1996.
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