The Term Structure of Sharpe Ratios and Arbitrage-Free Asset Pricing in Continuous Time

Patrick Beissner and Emanuela Rosazza Gianin
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Patrick Beissner: Humboldt University Berlin
Emanuela Rosazza Gianin: University of Milano-Bicocca

No 72, Rationality and Competition Discussion Paper Series from CRC TRR 190 Rationality and Competition

Abstract: Recent empirical studies suggest a downward sloping term structure of Sharpe ratios. We present a theoretical framework in continuous time that can cope with such a non-flat forward curve of risk prices. The approach departs from an arbitrage-free and incomplete market setting when different pricing measures are possible. Involved pricing measures now depend on the time of evaluation or the maturity of payoffs. This results in a time inconsistent pricing scheme. The dynamics can be captured by a time-delayed backward stochastic Volterra integral equation, which to the best of our knowledge, has not yet been studied.

Keywords: term structures; sharpe ratio; incomplete markets; asset pricing; time inconsistency; arbitrage; (time-delayed) volterra equations (search for similar items in EconPapers)
Date: 2018-02-15
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