Robust stochastic discount factors

• 成果类型: Article
• 署名作者: Boyle, Phelim; Feng, Shui; Tian, Weidong; Wang, Tan
• 署名单位: University of Waterloo; Wilfrid Laurier University; McMaster University; University of British Columbia
• 刊物名称: REVIEW OF FINANCIAL STUDIES
• ISSN/ISSBN: 0893-9454
• DOI: 10.1093/rfs/hhm067
• 发表日期: 2008
• 页码: 1076
• 关键词: FLEMING-VIOT PROCESS; specification errors; PORTFOLIO SELECTION; incomplete markets; model uncertainty; NEUTRAL MUTATION; large deviations; asset prices; volatility; bounds

摘要

When the market is incomplete, a new non-redundant derivative security cannot be priced by no-arbitrage arguments alone. Moreover, there will be a multiplicity of stochastic discount factors and each of them may give a different price for the new derivative security. This paper develops an approach to the selection of a stochastic discount factor for pricing a new derivative security. The approach is based on the idea that the price of a derivative security should not vary too much when the payoff of the primitive security is slightly perturbed, i.e., the price of the derivative should be robust to model misspecification. The paper develops two metrics of robustness. The first is based on robustness in expectation. The second is based on robustness in probability and draws on tools from the theory of large deviations. We show that in a stochastic volatility model, the two metrics yield analytically tractable bounds for the derivative price, as the underlying stochastic volatility model is perturbed. The bounds can be readily used for numerical examination of the sensitivity of the price of the derivative to model misspecification.