Pricing and hedging in incomplete markets with coherent risk

Alexander S. Cherny, Dilip B. Madan

Published 2006-05-02Version 1

We propose a pricing technique based on coherent risk measures, which enables one to get finer price intervals than in the No Good Deals pricing. The main idea consists in splitting a liability into several parts and selling these parts to different agents. The technique is closely connected with the convolution of coherent risk measures and equilibrium considerations. Furthermore, we propose a way to apply the above technique to the coherent estimation of the Greeks.