The Theory of Good-Deal Pricing in Financial Markets

FORC Preprint, No. 98/90

Geman H., Madan D., Pliska S., Vorst T.(eds.): Mathematical Finance – Bachelier Congress 2000, 175-202, Springer

34 Pages Posted: 2 Jul 2004 Last revised: 30 Sep 2019

See all articles by Aleš Černý

Aleš Černý

Bayes Business School, City, University of London

Stewart D. Hodges

University of Warwick - Financial Options Research Centre (FORC)

Date Written: September 16, 1998

Abstract

In this paper the term "good-deal pricing" stands for any pricing technique based on the absence of attractive investment opportunities - good deals - in equilibrium. The theory presented here shows that any such technique can be seen as a generalization of no-arbitrage pricing and that, with a little bit of care, it will contain the no-arbitrage and the representative agent equilibrium as the two opposite ends of a spectrum of possible no-good-deal equilibrium restrictions. We formulate the Extension and the Pricing Theorem in no-good-deal framework and establish general properties of no-good-deal price bounds determined by von Neumann-Morgenstern preferences. Our theory provides common footing to a range of applications, such as Bernardo and Ledoit (2000), Cerny (1999), Cochrane and Saá-Requejo (2000), and Hodges (1998).

Keywords: arbitrage, good deal, virtually desirable claim, state price functional, incomplete market, reward for risk measure, Generalized Sharpe Ratio, admissible price region, equivalent martingale measure

JEL Classification: G12, D40

Suggested Citation

Černý, Aleš and Hodges, Stewart D., The Theory of Good-Deal Pricing in Financial Markets (September 16, 1998). FORC Preprint, No. 98/90, Geman H., Madan D., Pliska S., Vorst T.(eds.): Mathematical Finance – Bachelier Congress 2000, 175-202, Springer, Available at SSRN: https://ssrn.com/abstract=560682

Aleš Černý (Contact Author)

Bayes Business School, City, University of London ( email )

Northampton Square
London, EC1V 0HB
United Kingdom

Stewart D. Hodges

University of Warwick - Financial Options Research Centre (FORC) ( email )

Warwick Business School
Coventry CV4 7AL
United Kingdom
01203-523606 (Phone)