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Robust Good-Deal Bounds In Incomplete Markets: The Case Of Taiwan

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  • CHEN, JUN-HOME
  • HUANG, YU-LIEH
  • CHANG, JOW-RAN

Abstract

We extend Cochrane and Saa-Requejoʼs (2000) analysis to derive good-deal bounds on asset prices when investors are concerned about model uncertainty and seek robust pricing decisions in incomplete markets. We investigate properties of the proposed pricing bounds and apply these bounds to value a European option whose underlying asset is a non-traded stock index. We find that, under certain circumstances of model uncertainty, the proposed pricing bounds can include sufficient amounts of the actual option prices, which is in contrast with the empirical finding of the good-deal bounds proposed by Cochrane and Saa-Requejo (2000).

Suggested Citation

  • Chen, Jun-Home & Huang, Yu-Lieh & Chang, Jow-Ran, 2017. "Robust Good-Deal Bounds In Incomplete Markets: The Case Of Taiwan," Hitotsubashi Journal of Economics, Hitotsubashi University, vol. 58(1), pages 53-67, June.
  • Handle: RePEc:hit:hitjec:v:58:y:2017:i:1:p:53-67
    DOI: 10.15057/28615
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    References listed on IDEAS

    as
    1. John H. Cochrane, 1997. "Where is the market going? Uncertain facts and novel theories," Economic Perspectives, Federal Reserve Bank of Chicago, vol. 21(Nov), pages 3-37.
    2. John H. Cochrane & Jesus Saa-Requejo, 2000. "Beyond Arbitrage: Good-Deal Asset Price Bounds in Incomplete Markets," Journal of Political Economy, University of Chicago Press, vol. 108(1), pages 79-119, February.
    3. Ľluboš Pástor & Robert F. Stambaugh, 2001. "The Equity Premium and Structural Breaks," Journal of Finance, American Finance Association, vol. 56(4), pages 1207-1239, August.
    4. Hans, Erwin & Wullink, Gerhard & van Houdenhoven, Mark & Kazemier, Geert, 2008. "Robust surgery loading," European Journal of Operational Research, Elsevier, vol. 185(3), pages 1038-1050, March.
    5. Thomas J. Sargent & Riccardo Colacito & Lars P. Hansen & Timothy Cogley, 2008. "Robustness and US Monetary," 2008 Meeting Papers 228, Society for Economic Dynamics.
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    More about this item

    Keywords

    Good-deal bounds; incomplete markets; parameter uncertainty; robustness;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • D52 - Microeconomics - - General Equilibrium and Disequilibrium - - - Incomplete Markets

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