Pricing and Hedging in Incomplete Markets with Coherent Risk

21 Pages Posted: 30 May 2006

See all articles by Alexander S. Cherny

Alexander S. Cherny

Moscow State University

Dilip B. Madan

University of Maryland - Robert H. Smith School of Business

Date Written: May 2, 2006

Abstract

We propose a pricing technique based on coherent risk measures, which enables one to get finer price intervals than in the No Good Deals pricing. The main idea consists in splitting a liability into several parts and selling these parts to different agents. The technique is closely connected with the convolution of coherent risk measures and equilibrium considerations.

Furthermore, we propose a way to apply the above technique to the coherent estimation of the Greeks.

Keywords: CDO, coherent risk measure, extreme measure, incomplete markets, factor risk, No Strictly Acceptable Opportunities, risk contribution, sensitivity coefficients, valuation measure, Weighted VaR

JEL Classification: G12, G13

Suggested Citation

Cherny, Alexander S. and Madan, Dilip B., Pricing and Hedging in Incomplete Markets with Coherent Risk (May 2, 2006). Available at SSRN: https://ssrn.com/abstract=904806 or http://dx.doi.org/10.2139/ssrn.904806

Alexander S. Cherny (Contact Author)

Moscow State University ( email )

Faculty of Mechanics and Mathematics
Department of Probability Theory
Moscow, 119992
Russia
007 095 939 14 03 (Phone)
007 095 939 14 03 (Fax)

HOME PAGE: http://mech.math.msu.su/~cherny

Dilip B. Madan

University of Maryland - Robert H. Smith School of Business ( email )

College Park, MD 20742-1815
United States
301-405-2127 (Phone)
301-314-9157 (Fax)

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