Towards a General Theory of Good-Deal Bounds

Tomas Bjork and Irina Slinko

Review of Finance, 2006, vol. 10, issue 2, 221-260

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 gooddeal pricing bounds for derivative assets, thereby extending the results by Cochrane and Saá Requejo (2000) to the point process case, while, at the same time, obtaining a radical simplification of the theory. To illustrate, we present numerical results for the classic Merton jump-diffusion model. As a by-product of the general theory, we derive extended Hansen-Jagannathan bounds for the Sharpe Ratio process in the point process setting. Copyright 2006, Oxford University Press.

Date: 2006
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Working Paper: Towards a General Theory of Good Deal Bounds (2004)
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