RT Journal Article
T1 Good deals in markets with friction
A1 Balbás, Alejandro
A1 Balbás, Beatriz
A1 Balbás, Raquel
AB This paper studies an optimization problem involving pay-offs of (perhaps dynamic) investmentstrategies. The pay-off is the decision variable, the expected pay-off is maximized and its risk isminimized. The pricing rule may incorporate transaction costs and the risk measure is continuous,coherent and expectation bounded.We will prove the necessity of dealing with pricing rules such thatthere exists an essentially bounded stochastic discount factor that must also be bounded from belowby a strictly positive value. Otherwise, good deals will be available to traders, i.e. depending on theselected risk measure, investors can choose pay-offs whose (risk, return) will be as close as desiredto (−1,1) or (−1,1). This pathological property still holds for vector risk measures (i.e. if weminimize a vector-valued function whose components are risk measures). It is worth pointing out that,essentially, bounded stochastic discount factors are not usual in the financial literature. In particular,the most famous frictionless, complete and arbitrage-free pricing models imply the existence of gooddeals for every continuous, coherent and expectation bounded (scalar or vector) measure of risk, andthe incorporation of transaction costs will not guarantee the solution of this caveat
PB Taylor & Francis
SN 1469-7688
YR 2013
FD 2013-06
LK https://hdl.handle.net/10016/18157
UL https://hdl.handle.net/10016/18157
LA eng
NO This research was partially supported by RD_Sistemas SA,Welzia Management SGIIC SA, and Ministerio deEconomía, Spain (grants ECO2009-14457-C04 and ECO2012-39031-C02-01)
DS e-Archivo
RD 24 may. 2024