Market consistent valuations with financial imperfection

Assa, H and Gospodinov, Nikolay (2018) Market consistent valuations with financial imperfection. Decisions in Economics and Finance: a journal of applied mathematics, 41 (1). pp. 65-90.

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Abstract

In this paper, we study market consistent valuations in imperfect markets. In the first part of the paper, we observe that in an imperfect market one needs to distinguish two type of market consistencies, namely types I and II. We show that while market consistency of type I holds without very strong conditions, market consistency of type II (which in the literature is known as the usual definition of market consistency) is only well defined in perfect markets. This is important since the existing literature on market consistency considers perfect markets where the two market consistencies are equivalent. In the second part of the paper, by introducing a best estimator we find strong connections between hedging and market consistency of either type. We show under very general conditions, the type I and the type II market consistent evaluators are best estimators, and establish a two-step representation for the market consistent risk evaluators. In the third part of the paper, we present several families of market consistent evaluators in imperfect markets.

Item Type:	Article
Uncontrolled Keywords:	Imperfect financial valuation, Risk evaluation, Hedging, Market consistent valuation
Depositing User:	Symplectic Admin
Date Deposited:	10 Apr 2018 06:22
Last Modified:	19 Jan 2023 06:36
DOI:	10.1007/s10203-018-0207-2
Related URLs:	Author Publisher
URI:	https://livrepository.liverpool.ac.uk/id/eprint/3019984