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Extending pricing rules with general risk

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2008-04
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Department of Mathematics and Statistics, Concordia University
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The paper addresses pricing issues in imperfect and/or incomplete markets if the risk level of the hedging strategy is measured by a general risk function. Convex Optimization Theory is used in order to extend pricing rules for a wide family of risk functions, including Deviation Measures, Expectation Bounded Risk Measures and Coherent Measures of Risk. For imperfect markets the extended pricing rules reduce the bid-ask spread. The paper ends by particularizing the findings so as to study with more detail some concrete examples, including the Conditional Value at Risk and some properties of the Standard Deviation
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Incomplete and imperfect market, Risk measure and deviation measure,, Pricing rule, Convex optimization, Risk measure and deviation measure, Convex optimization
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