Departmental Bulletin Paper ROBUST GOOD-DEAL BOUNDS IN INCOMPLETE MARKETS: THE CASE OF TAIWAN

CHEN, JUN-HOME  ,  HUANG, YU-LIEH  ,  CHANG, JOW-RAN

58 ( 1 )  , pp.53 - 67 , 2017-06 , Hitotsubashi University
ISSN:0018-280x
NCID:AA00207547
Description
We extend Cochrane and Saa-Requejoʼs (2000) analysis to derive good-deal bounds on asset prices when investors are concerned about model uncertainty and seek robust pricing decisions in incomplete markets. We investigate properties of the proposed pricing bounds and apply these bounds to value a European option whose underlying asset is a non-traded stock index. We find that, under certain circumstances of model uncertainty, the proposed pricing bounds can include sufficient amounts of the actual option prices, which is in contrast with the empirical finding of the good-deal bounds proposed by Cochrane and Saa-Requejo (2000).
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http://hermes-ir.lib.hit-u.ac.jp/rs/bitstream/10086/28615/1/HJeco0580100530.pdf

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