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The Term Structure of Sharpe Ratios and Arbitrage-Free Asset Pricing in Continuous Time

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  • Beissner, Patrick

    (Humboldt University Berlin)

  • Rosazza Gianin, Emanuela

    (University of Milano-Bicocca)

Abstract

Recent empirical studies suggest a downward sloping term structure of Sharpe ratios. We present a theoretical framework in continuous time that can cope with such a non-flat forward curve of risk prices. The approach departs from an arbitrage-free and incomplete market setting when different pricing measures are possible. Involved pricing measures now depend on the time of evaluation or the maturity of payoffs. This results in a time inconsistent pricing scheme. The dynamics can be captured by a time-delayed backward stochastic Volterra integral equation, which to the best of our knowledge, has not yet been studied.

Suggested Citation

  • Beissner, Patrick & Rosazza Gianin, Emanuela, 2018. "The Term Structure of Sharpe Ratios and Arbitrage-Free Asset Pricing in Continuous Time," Rationality and Competition Discussion Paper Series 72, CRC TRR 190 Rationality and Competition.
    • Handle: RePEc:rco:dpaper:72
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    References listed on IDEAS

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