Towards a General Theory of Good-Deal Bounds* |
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Authors: | Tomas Bj?rk and Irina Slinko |
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Institution: | (1) Stockholm School of Economics, Sweden |
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Abstract: | 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, thereby extending the results by Cochrane and Saá
Requejo (2000) to the point process case, while, at the same time, obtaining a radical simplification of the theory. To illustrate,
we present numerical results for the classic Merton jump-diffusion model. As a by-product of the general theory, we derive
extended Hansen-Jagannathan bounds for the Sharpe Ratio process in the point process setting.
*We gratefully acknowledge financial support from the Jan Wallander and Tom Hedelius foundation. We thank Anders Forsgren,
Krister Svanberg, and Jan Kallsen for a number of very helpful comments. We are very grateful to Mathias Stolpe for providing
us with the optimization code used in our numerical example. A number of very helpful comments from the editor and an anonymous
referee has greatly improved the paper. |
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Keywords: | |
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