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Good deal indices in asset pricing: actuarial and financial implications

Good deal indices in asset pricing: actuarial and financial implications
Good deal indices in asset pricing: actuarial and financial implications
We integrate into a single optimization problem a risk measure, beyond the variance, and either arbitrage free real market quotations or …financial pricing rules generated by an arbitrage free stochastic pricing model. A sequence of investment strategies such that the couple (expected-return, risk ) diverges to (+∞, -∞) will be called a good deal. The existence of such a sequence is equivalent to the existence of an alternative sequence of strategies such that the couple (risk, price) diverges to (-∞, -∞). Moreover, by appropriately adding the riskless asset, every good deal may generate a new one only composed of strategies priced at one.

We will see that good deals often exist in practice, and the main objective of this paper will be to measure the good deal size. The provided good deal indices will equal an optimal ratio between both risk and price, and there will exist alternative interpretations of these indices. They also provide the minimum relative (per dollar) price modification that prevents the existence of good deals. Moreover, they will be a crucial instrument to detect those securities or marketed claims which are over- or under-priced.

Many classical actuarial and …financial optimization problems may generate wrong solutions if the used market quotations or stochastic pricing models do not prevent the existence of good deals. This fact is illustrated in the paper, and we point out how the provided good deal indices may be useful to overcome this caveat. Numerical experiments are included as well.
0969-6016
1475-1503
Balbas, Alejandro
af095c60-b809-481e-8c49-2982c3d9c0fc
Garrido, Jose
f1c4a12e-0754-4aa4-81e9-949325bc7574
Okhrati, Ramin
e8e0b289-be8c-4e73-aea5-c9835190a54a
Balbas, Alejandro
af095c60-b809-481e-8c49-2982c3d9c0fc
Garrido, Jose
f1c4a12e-0754-4aa4-81e9-949325bc7574
Okhrati, Ramin
e8e0b289-be8c-4e73-aea5-c9835190a54a

Balbas, Alejandro, Garrido, Jose and Okhrati, Ramin (2019) Good deal indices in asset pricing: actuarial and financial implications. International Transactions in Operational Research, 26 (4), 1475-1503. (doi:10.1111/itor.12424).

Record type: Article

Abstract

We integrate into a single optimization problem a risk measure, beyond the variance, and either arbitrage free real market quotations or …financial pricing rules generated by an arbitrage free stochastic pricing model. A sequence of investment strategies such that the couple (expected-return, risk ) diverges to (+∞, -∞) will be called a good deal. The existence of such a sequence is equivalent to the existence of an alternative sequence of strategies such that the couple (risk, price) diverges to (-∞, -∞). Moreover, by appropriately adding the riskless asset, every good deal may generate a new one only composed of strategies priced at one.

We will see that good deals often exist in practice, and the main objective of this paper will be to measure the good deal size. The provided good deal indices will equal an optimal ratio between both risk and price, and there will exist alternative interpretations of these indices. They also provide the minimum relative (per dollar) price modification that prevents the existence of good deals. Moreover, they will be a crucial instrument to detect those securities or marketed claims which are over- or under-priced.

Many classical actuarial and …financial optimization problems may generate wrong solutions if the used market quotations or stochastic pricing models do not prevent the existence of good deals. This fact is illustrated in the paper, and we point out how the provided good deal indices may be useful to overcome this caveat. Numerical experiments are included as well.

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Submitted date: 2016
Accepted/In Press date: 14 April 2017
e-pub ahead of print date: 22 May 2017
Published date: July 2019
Organisations: Statistics

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Local EPrints ID: 399168
URI: http://eprints.soton.ac.uk/id/eprint/399168
ISSN: 0969-6016
PURE UUID: bc08afa7-62d6-46d4-b87f-516de71a2ff5
ORCID for Ramin Okhrati: ORCID iD orcid.org/0000-0003-0103-7051

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Date deposited: 17 Jan 2017 10:22
Last modified: 27 Jan 2020 13:46

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Author: Alejandro Balbas
Author: Jose Garrido
Author: Ramin Okhrati ORCID iD

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