Abstract
This work studies Good Deals in a scenario in which a firm uses decision-making tools based on a coherent risk measure, and in which the market prices are determined with a sub-linear pricing rule. The most important observation of this work is that the existence of a Good Deal is equivalent to the incompatibility between the pricing rule and the risk measure. In this paper, we look into this situation from a regulatory point of view to rule out Good Deals with the purpose of stabilizing financial markets. We propose some practical ways of modifying a risk measure so a regulator can set appropriate levels of capital requirements for a financial institution.
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Assa, H., Balbás, A. Good Deals and compatible modification of risk and pricing rule: a regulatory treatment. Math Finan Econ 4, 253–268 (2011). https://doi.org/10.1007/s11579-011-0044-3
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DOI: https://doi.org/10.1007/s11579-011-0044-3
Keywords
- Coherent risk measure
- Pricing rule
- Good deal
- Compatibility
- Risk modification
- Risk spread
- Performance ratio