Abstract

http://ssrn.com/abstract=2192559
 
 

References (44)



 
 

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No Good Deals — No Bad Models


Nina Boyarchenko


Federal Reserve Bank of New York

Mario Cerrato


London Metropolitan University - Department of Economics, Finance and International Business (EFIB)

John Crosby


University of Glasgow

Stewart D. Hodges


University of Warwick - Financial Options Research Centre (FORC)

July 14, 2014

FRB of New York Staff Report No. 589
26th Australasian Finance and Banking Conference 2013

Abstract:     
Faced with the problem of pricing complex contingent claims, an investor seeks to make her valuations robust to model uncertainty. We construct a notion of a model-uncertainty-induced preference functional and extend the "No Good Deals" methodology of Cochrane and Saa-Requejo (2000) to compute lower and upper good deal bounds in the presence of model uncertainty. We illustrate the methodology using numerical examples. Estimating a time-series of the degree of aversion to model uncertainty for an investor in the S&P 500 market, we find that increases in uncertainty aversion correspond to worsening financial market conditions.

Number of Pages in PDF File: 62

Keywords: good deal bounds, model-uncertainty-induced preference functional, asset pricing theory, Knightian uncertainty, model uncertainty, contingent claim pricing

JEL Classification: G12, G13

working papers series


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Date posted: December 22, 2012 ; Last revised: July 17, 2014

Suggested Citation

Boyarchenko, Nina and Cerrato, Mario and Crosby, John and Hodges, Stewart D., No Good Deals — No Bad Models (July 14, 2014). FRB of New York Staff Report No. 589; 26th Australasian Finance and Banking Conference 2013. Available at SSRN: http://ssrn.com/abstract=2192559 or http://dx.doi.org/10.2139/ssrn.2192559

Contact Information

Nina Boyarchenko
Federal Reserve Bank of New York ( email )
33 Liberty Street
New York, NY 10045
United States
212-720-7339 (Phone)
212-720-1582 (Fax)
Mario Cerrato
London Metropolitan University - Department of Economics, Finance and International Business (EFIB) ( email )
Economics Subject Group, LMBS
London EC2M 6SQ, EC2M 6SQ
United Kingdom
John Crosby (Contact Author)
University of Glasgow ( email )
Glasgow University Business School
Glasgow, Scotland G12 8LE
United Kingdom
HOME PAGE: http://www.john-crosby.co.uk
Stewart D. Hodges
University of Warwick - Financial Options Research Centre (FORC) ( email )
Warwick Business School
Coventry CV4 7AL
United Kingdom
01203-523606 (Phone)
Feedback to SSRN


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