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Coherent risk measures and good-deal bounds

Author

Listed:
  • Stefan Jaschke

    (Weierstraß-Institut für Angewandte Analysis und Stochastik, Mohrenstrasse 39, 10117 Berlin, Germany)

  • Uwe Küchler

    (Humboldt-Universität zu Berlin, Institut für Mathematik, Rudower Chaussee 25, 12489 Berlin, Germany Manuscript)

Abstract

The relation between coherent risk measures, valuation bounds, and certain classes of portfolio optimization problems is established. One of the key results is that coherent risk measures are essentially equivalent to generalized arbitrage bounds, named "good deal bounds" by Cerny and Hodges (1999). The results are economically general in the sense that they work for any cash stream spaces, be it in dynamic trading settings, one-step models, or deterministic cash streams. They are also mathematically general as they work in (possibly infinite-dimensional) linear spaces. The valuation theory presented seems to fill a gap between arbitrage valuation on the one hand and utility maximization (or equilibrium theory) on the other hand. "Coherent" valuation bounds strike a balance in that the bounds can be sharp enough to be useful in the practice of pricing and still be generic, i.e., somewhat independent of personal preferences, in the way many coherent risk measures are somewhat generic.

Suggested Citation

  • Stefan Jaschke & Uwe Küchler, 2001. "Coherent risk measures and good-deal bounds," Finance and Stochastics, Springer, vol. 5(2), pages 181-200.
    • Handle: RePEc:spr:finsto:v:5:y:2001:i:2:p:181-200
    Note: received: March 1999; final version received: March 2000
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    More about this item

    Keywords

    Coherent risk measures; valuation bounds; portfolio optimization; robust hedging; convex duality;
    All these keywords.

    JEL classification:

    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • D52 - Microeconomics - - General Equilibrium and Disequilibrium - - - Incomplete Markets

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