Browsing Articles by Author "Murgoci, Agatha"
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Björk, Tomas; Murgoci, Agatha; Zhou, Xun Yu (, 2009)[More information][Less information]
Abstract: The objective of this paper is to study the mean–variance portfolio optimization in continuous time. Since this problem is time inconsistent we attack it by placing the problem within a game theoretic framework and look for subgame perfect Nash equilibrium strategies. This particular problem has already been studied in [2] where the authors assumed a con stant risk aversion parameter. This assumption leads to an equilibrium control where the dollar amount invested in the risky asset is independent of current wealth, and we argue that this result is unrealistic from an eco nomic point of view. In order to have a more realistic model we instead study the case when the risk aversion depends dynamically on current wealth. This is a substantially more complicated problem than the one with constant risk aversion but, using the general theory of time inconsis tent control developed in [4], we provide a fairly detailed analysis on the general case. In particular, when the risk aversion is inversely proportional to wealth, we provide an analytical solution where the equilibrium dollar amount invested in the risky asset is proportional to current wealth. The equilibrium for this model thus appears more reasonable than the one for the model with constant risk aversion. URI: http://hdl.handle.net/10398/9097 Files in this item: 1

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Abstract: We price vulnerable derivatives  i.e. derivatives where the counter party may default. These are basically the derivatives traded on the OTC markets. Default is modeled in a structural framework. The technique employed for pricing is Good Deal Bounds. The method imposes a new restriction in the arbitrage free model by setting upper bounds on the Sharpe ratios of the assets. The potential prices which are eliminated represent unreasonably good deals. The constraint on the Sharpe ratio translates into a constraint on the stochastic discount factor. Thus, tight pricing bounds can be obtained. We provide a link between the objec tive probability measure and the range of potential risk neutral measures which has an intuitive economic meaning. We also provide tight pricing bounds for European calls and show how to extend the call formula to pricing other nancial products in a consistent way. Finally, we numeri cally analyze the behavior of the good deal pricing bounds. URI: http://hdl.handle.net/10398/8899 Files in this item: 1
Now showing items 12 of 2