Towards a General Theory of Good Deal Bounds

34 Pages Posted: 27 Feb 2005

See all articles by Tomas Bjork

Tomas Bjork

Stockholm School of Economics - Swedish House of Finance

Irina Slinko

Swedbank, Group Risk Control

Date Written: February 3, 2005

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 along the lines of Cochrane and Saa-Requejo (2000), extending the results from their paper to the point process case.

As a concrete application we present numerical results for the classic Merton jump-diffusion model. As a by product of the general theory we also extend the Hansen-Jagannathan bounds for the Sharpe Ratio to the point process setting.

Keywords: Incomplete markets, good deal bounds, derivatives pricing

JEL Classification: G12, G13

Suggested Citation

Bjork, Tomas and Slinko, Irina, Towards a General Theory of Good Deal Bounds (February 3, 2005). EFA 2005 Moscow Meetings Paper. Available at SSRN: https://ssrn.com/abstract=675225 or http://dx.doi.org/10.2139/ssrn.675225

Tomas Bjork (Contact Author)

Stockholm School of Economics - Swedish House of Finance ( email )

Drottninggatan 98
111 60 Stockholm
Sweden

Irina Slinko

Swedbank, Group Risk Control ( email )

SE-105 34 Stockholm
Sweden

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