Abstract
The term ‘no-good-deal pricing’ in this paper encompasses pricing techniques base on the absence of attractive investment opportunities — good deals — in equilibrium. We borrowed the term from [8] who pioneered the calculation of price bands conditional on the absence of high Sharpe Ratios. Alternative methodologies for calculating tighter-than-no-arbitrage price bounds have been suggested by [4], [6], [12]. The theory presented here shows that any of these techniques can be seen as a generalization of no-arbitrage pricing. The common structure is provided by the Extension and Pricing Theorems, already well known from no-arbitrage pricing, see [15]. We derive these theorems in no-good-deal framework and establish general properties of no-good-deal prices. These abstract results are then applied to no-goos-deal bounds determined by von Neumann-Morgenstern preferences in a finite state model1. One important result is that no-good-deal bouns generated by an unbounded utility function are always strictly tighter than the no-arbitrage bounds. The same is not true for bounded utility functions. For smooth utility functions we show that one will obtain the no-arbitrage and the representative agent equilibrium as the two opposite ends of a spectrum of no-good-deal equilibrium restrictions indexed by the maximum attainable certainty equivalent gains.
Access this chapter
Tax calculation will be finalised at checkout
Purchases are for personal use only
Preview
Unable to display preview. Download preview PDF.
References
Philippe Artzner, Freddy Delbaen, Jean-Marc Eber, and David Heath. Coherent measures of risk. Mathematical Finance, 9 (3): 203–228, 1999.
Brian Beavis and Ian Dobbs. Optimization and Stability Theory or Economic Analysis. Cambridge University Press, 1990.
Fabio Bellini and Marco Fritelli. On the existence of minimax martingale measures. Rapporto di Ricerca 14/2000, University degli Studi Milano - Bicocca, May 2000.
Antonio Bernardo and Olivier Ledoit. Gain, loss and asset pricing. Journal of Political Economy, 108 (1): 144–172, 2000.
Antonio E. Bernardo and Olivier Ledoit. Approximate arbitrage. Working paper 18–99, Anderson School,, November 1999.
Aleš Cerný. Generalized Sharpe Ratio and consistent good-deal restrictions in a model of continuous trading. Discussion Paper SWP9902, Imperial College Management School, April 1999.
Stephen A. Clark.T he valuation problem in arbitrage price theory. Journal of Mathematical Economics, 22: 463–478, 1993.
John H. Cochrane and Jesus Sad-equejo. Beyond arbitrage: Good-Ddeal asset price bounds in incomplete markets. Journal of Molitical Economy, 108 (1): 79–119, 2000.
Philip H. Dybvig and Stephen A. Ross. Arbitrage. In J. Eatwell,M.M ilgate, and P. Newman, editors, The New Palgrave: A Dictionary o Economics, volume 1, pages 100–106. M acmillan, London, 1987.
Nicole El Karoui and Marie-Claire Quenez. Dynamic programming and pricing of contingent claims in an incomplete market. Journal of Control and Optimization, 33 (1): 29–66, 1995.
Lars Peter Hansen and Ravi Jagannathan. Implications of security market data for models of dynamic economies. Journal of Political Economy, 99 (2): 225–262, 1991.
Stewart odges. A generalization of the Sharpe atio and its application to valuation bounds and risk measures. FORC reprint 9888, niversity of arwick, pril 1998.
Jonathan E. Ingersoll. Theory of Financial Decision Making. Rowman, and Littleeld Studies in Financial Economics. Rowman, and Littleeld, 1987.
Stefan Jaschke and UweK uechler. Coherent risk measures and good-deal bounds.F inance and Stochastics, 5(2), 2001.
D.Kreps. Arbitrage and equilibrium in economies with innitely many commodities. Journal of Mathematical Economics, 8: 15–35, 1981.
Robert Merton. Theory of rational option pricing. Bell Journal o Economics and Management Science, 4: 141–183, 1973.
Peter H. Ritchken. On option pricing bounds. The Journal o Finance, 40 (4): 1219–1233, 1985.
Stephen A.R oss. The arbitrage theory of capital asset pricing. Journal of aconomic theory, 13: 341–360, 1976.
Stephen A. Ross. A simple approach to the valuation of risky streams. Journal of Business, 51: 453–475, 1978.
Mark Rubinstein. The valuation of uncertain income streams and the pricing of options. The Bell Journal of Economics, 7: 407–425, 1976.
Walter Schachermayer. Martingale measures for discrete time processes with innite horizon. Mathematical Finance, 4 (1): 25–55, 1994.
Author information
Authors and Affiliations
Editor information
Editors and Affiliations
Rights and permissions
Copyright information
© 2002 Springer-Verlag Berlin Heidelberg
About this chapter
Cite this chapter
Černý, A., Hodges, S. (2002). The Theory of Good-Deal Pricing in Financial Markets. In: Geman, H., Madan, D., Pliska, S.R., Vorst, T. (eds) Mathematical Finance — Bachelier Congress 2000. Springer Finance. Springer, Berlin, Heidelberg. https://doi.org/10.1007/978-3-662-12429-1_9
Download citation
DOI: https://doi.org/10.1007/978-3-662-12429-1_9
Publisher Name: Springer, Berlin, Heidelberg
Print ISBN: 978-3-642-08729-5
Online ISBN: 978-3-662-12429-1
eBook Packages: Springer Book Archive