No Good Deals - No Bad Models

Nina Boyarchenko, Mario Cerrato, Crosby John and Hodges Stewart

No 2013-20, SIRE Discussion Papers from Scottish Institute for Research in Economics (SIRE)

Abstract: Faced with the problem of pricing complex contingent claims, an investor seeks to make his valuations robust to model uncertainty. We construct a notion of a model- uncertainty-induced utility function and show that model uncertainty increases the investor's eff ective risk aversion. Using the model-uncertainty-induced utility function, we extend the \No Good Deals" methodology of Cochrane and Sa a-Requejo [2000] to compute lower and upper good deal bounds in the presence of model uncertainty. We illustrate the methodology using some numerical examples.

Keywords: Asset pricing theory; Good deal bounds; Knightian uncertainty; Model uncertainty; Contingent claim pricing; model-uncertainty-induced utility function (search for similar items in EconPapers)
Date: 2013
New Economics Papers: this item is included in nep-hpe and nep-upt
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Related works:
Working Paper: No Good Deals—No Bad Models (2014)
Working Paper: No Good Deals - No Bad Models (2013)
Working Paper: No good deals—no bad models (2012)
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Persistent link: https://EconPapers.repec.org/RePEc:edn:sirdps:452

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