Scandinavian Working Papers in Economics

SSE/EFI Working Paper Series in Economics and Finance,
Stockholm School of Economics

No 0448: An Extension of Good-Deal Asset Price Bounds

Iñaki R. Longarela (inaki.rodriguez@hhs.se)
Additional contact information
Iñaki R. Longarela: Dept. of Finance, Stockholm School of Economics, Postal: Stockholm School of Economics, P.O. Box 6501, S-113 83 Stockholm, Sweden

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

JEL-codes: C63; G12

20 pages, First version: May 21, 2001. Revised: October 19, 2001. Earlier revisions: October 19, 2001.

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

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