Group for Research in Decision Analysis


Good Deals and Compatible Modification of Risk and Pricing Rule: A Regulatory Treatment

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In this paper we study the situation when a market might be destabilized in the presence of Good Deals. A Good Deal is in general a financial position while making no cost, does not produce any risk. We study Good Deals while a firm deals with a coherent risk measure and the market prices are ruled 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. Incompatibility has been introduced and studied in Balbás and Balbás (2009). We look into this situation from regulatory point of view in order to rule out Good Deals, purposing to stabilize financial markets. We propose some practical ways of modifying a risk measure in a minimal way, for regulating financial institutions to reserve more capital, in order to place financial institutions in a safer position.

, 22 pages

This cahier was revised in May 2010