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

No 595:
Towards a General Theory of Good Deal Bounds

Tomas Björk () and Irina Slinko ()

Abstract: We consider an incomplete market in the form of a multidimensional Markovian factor model, driven by a general marked point process (representing discrete jump events) as well as by a standard multidimensional Wiener process. Within this framework we study arbitrage free good deal pricing bounds for derivative assets along the lines of Cochrane and Saa-Requejo, extending the CSR results to the point process case.

As a concrete application we present numerical results for the classic Merton jump-diffusion model. As a by product of the general theory we also extend the Hansen-Jagannathan bounds for the Sharpe Ratio to the point process setting.

Keywords: Incomplete markets; good deal bounds; financial derivatives; arbitrage pricing; (follow links to similar papers)

JEL-Codes: G12; G13; (follow links to similar papers)

35 pages, February 3, 2004

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