No good deals - no bad models
Faced with the problem of pricing complex contingent claims, investors seek to make their valuations robust to model uncertainty. We construct a notion of a modeluncertainty-induced utility function and show that model uncertainty increases investors' effective risk aversion. Using this utility function, we extend the no good deals methodology of Cochrane and SaĆ”-Requejo (2000) to compute lower and upper gooddeal bounds in the presence of model uncertainty. We illustrate the methodology using some numerical examples.
Year of publication: |
2012
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Authors: | Boyarchenko, Nina ; Cerrato, Mario ; Crosby, John ; Hodges, Stewart |
Publisher: |
New York, NY : Federal Reserve Bank of New York |
Subject: | asset pricing theory | good-deal bounds | Knightian uncertainty | model uncertainty | contingent claim pricing | model-uncertainty-induced utility function |
Saved in:
freely available
Series: | Staff Report ; 589 |
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Type of publication: | Book / Working Paper |
Type of publication (narrower categories): | Working Paper |
Language: | English |
Other identifiers: | 733626769 [GVK] hdl:10419/93654 [Handle] RePEc:fip:fednsr:589 [RePEc] |
Classification: | G12 - Asset Pricing ; G13 - Contingent Pricing; Futures Pricing |
Source: |
Persistent link: https://www.econbiz.de/10010333634