TY  - JOUR
AU  - Cochrane,John H.
AU  - Saa-Requejo,Jesus
TI  - Beyond Arbitrage: "Good-Deal" Asset Price Bounds in Incomplete Markets
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 5489
PY  - 1996
Y2  - March 1996
UR  - http://www.nber.org/papers/w5489
L1  - http://www.nber.org/papers/w5489.pdf
N1  - Author contact info:
John H. Cochrane
Booth School of Business
University of Chicago
5807 S. Woodlawn
Chicago, IL  60637
Tel: 773/702-3059
Fax: 773/702-0458
E-Mail: john.cochrane@chicagobooth.edu
AB  - 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.
ER  -