No Good Deals - No Bad Models

Nina Boyarchenko, Mario Cerrato, John Crosby and Stewart Hodges

Working Papers from Business School - Economics, University of Glasgow

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 effective risk aversion. Using the model-uncertainty-induced utility function, we extend the "No Good Deals" methodology of Cochrane and Saa-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)
JEL-codes: G12 G13 (search for similar items in EconPapers)
Date: 2013-01
New Economics Papers: this item is included in nep-hpe, nep-mic and nep-upt
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http://www.gla.ac.uk/media/media_264152_en.pdf (application/pdf)

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:gla:glaewp:2013_04

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