On the inefficiency of Brownian motions and heavier tailed price processes

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dc.contributor.author Balbás, Alejandro
dc.contributor.author Balbás, Beatriz
dc.contributor.author Balbás, Raquel
dc.contributor.editor Universidad Carlos III de Madrid. Instituto para el Desarrollo Empresarial (INDEM)
dc.date.accessioned 2013-04-15T12:28:26Z
dc.date.available 2013-04-15T12:28:26Z
dc.date.issued 2013
dc.identifier.issn 1989-8843
dc.identifier.uri http://hdl.handle.net/10016/16705
dc.description.abstract Recent literature has shown the existence of pathologies if one combines the most important models for pricing and hedging derivatives and coherent risk measures. There may exist portfolios (good deals) whose (return; risk) is as close as desired to (1; 􀀀1). This paper goes beyond existence properties and looks for explicit constructions and empirical tests. It will be shown that the good deal above may be a combination of European and digital options, very easy to replicate in practice. This theoretical nding will enable us to implement empirical experiments involving three international stock indices (S&P_500, Eurostoxx_50 and DAX) and three commodity futures (Gold, Brent and DJ 􀀀 UBSCI). According to the empirical results, the good deal always outperforms the underlying index/commodity. The good deal is built in full compliance with the standard Derivative Pricing Theory. Properties of classical pricing models totally inspire and lead the good deal construction. This is a very interesting di¤erence with respect to previous literature attempting to outperform a benchmark. Besides, the selected pricing models satisfy the existence of risk neutral probabilities such that self- nancing price processes become martingales. According to recent results, while local martin- gales characterize the absence of arbitrage, martingales characterize the existence of equilibrium. However, this equilibrium is di¢ cult to imagine, because for every portfolio traders can build a new one with identical price, higher return and lower risk. Perhaps dynamic arbitrage free pricing models contradict other important achievements of Financial Economics related to e¢ ciency and equilibrium, and further research is required to recover consistency.
dc.description.sponsorship This research was partially supported by "RD_Sistemas SA", "Welzia Management SGIIC SA" and "Ministerio de Economía" (Spain), Grants ECO2009-14457-C04 and ECO2012-39031-C02-01
dc.format.mimetype application/pdf
dc.format.mimetype text/plain
dc.language.iso eng
dc.relation.ispartofseries INDEM Working Paper Business Economic
dc.relation.ispartofseries 13-01
dc.rights Atribución-NoComercial-SinDerivadas 3.0 España
dc.rights.uri http://creativecommons.org/licenses/by-nc-nd/3.0/es/
dc.subject.other Market efficiency
dc.subject.other Derivative pricing
dc.subject.other Risk measure
dc.subject.other Good deal
dc.title On the inefficiency of Brownian motions and heavier tailed price processes
dc.type workingPaper
dc.subject.jel G11
dc.subject.jel G13
dc.subject.jel G14
dc.subject.jel G32
dc.subject.eciencia Empresa
dc.rights.accessRights openAccess
dc.relation.projectID Comunidad de Madrid. S2009/ESP-1685/RIESGOS
dc.relation.projectID Gobierno de España. ECO2009-14457-C04
dc.relation.projectID Gobierno de España. ECO2012-39031-C02-01
dc.identifier.repec id-13-01
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