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Generalized Sharpe Ratios and Asset Pricing in Incomplete Markets

Cern›, Ales
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Cern›, Ales: Imperial College

No 41, Royal Economic Society Annual Conference 2002 from Royal Economic Society

Abstract: This paper draws on the seminal article of Cochrane and Saa-Requejo (2000) who pioneered the calculation of option price bounds based on the absence of arbitrage and high Sharpe Ratios. Our contribution is threefold: We base the equilibrium restrictions on an arbitrary utility function, obtaining the C&S-R analysis as a special case with truncated quadratic utility. Secondly, we restate the discount factor restrictions in terms of Generalised Sharpe Ratios suitable for practical applications. Last but not least, we demonstrate that for ItÙ processes C&S-R price bounds are invariant to the choice of the utility function, and that in the limit they tend to a unique price determined by the minimal martingale measure.

New Economics Papers: this item is included in nep-fin and nep-fmk
Date: 2002-08-29
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