@techreport{NBERw5489,
title = "Beyond Arbitrage: "Good-Deal" Asset Price Bounds in Incomplete Markets",
author = "John H. Cochrane and Jesus Saa-Requejo",
institution = "National Bureau of Economic Research",
type = "Working Paper",
series = "Working Paper Series",
number = "5489",
year = "1996",
month = "March",
doi = {10.3386/w5489},
URL = "http://www.nber.org/papers/w5489",
abstract = {It is often useful to price assets and other random payoffs by reference to other observed prices rather than construct full-fledged economic asset pricing models. This approach breaks down if one cannot find a perfect replicating portfolio. We impose weak economic restrictions to derive usefully tight bounds on asset prices in this situation. The bounds basically rule out high Sharpe ratios - `good deals' - as well as arbitrage opportunities. We present the method of calculation, we extend it to a multiperiod context by finding a recursive solution, and we apply it to option pricing examples including the Black-Scholes setup with infrequent trading, and a model with stochastic stock volatility and a varying riskfree rate.},
}