Scandinavian Working Papers in Economics
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The Economic Research Institute, Stockholm School of Economics SSE/EFI Working Paper Series in Economics and Finance

No 448:
An Extension of Good-Deal Asset Price Bounds

Iņaki R. Longarela ()

Abstract: In a two-period setup we develop a generalization of good-deal bounds that allows to include in the problem the implications of asset pricing models. Our basis is the distance behind Hansen and Jagannathan's measure of model misspecification since a volatility constraint on the stochastic discount factor is a particular case of a restriction on this distance. We also present an alternative approach which mostly retains the economic interpretation underlying the above extension and it has a very useful property since the resulting bounds can be computed by simply solving a linear program.

Keywords: generalized good-deal bounds; L1-norm methods; (follow links to similar papers)

JEL-Codes: C63; G12; (follow links to similar papers)

20 pages, May 21, 2001, Revised October 19, 2001

The previous version of this working paper had the title "A New Approach to the Derivation of Asset Price Bounds".

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