Trade-off between robust risk measurement and market principles (Q493244)

This paper considers a hedging problem of a representative agent who wishes to determine an optimal hedge for a risky position by minimizing a risk measure subject to a price constraint. Firstly, the author shows that if a good deal exists, the hedging problem has no solution. This result is presented in Proposition 4.1. They also show that if a robust risk measure is used, then a pair of risk measure and pricing kernel generates good deals in a perfect market. This result is presented in Theorem 4.1. Then the authors introduce a minimal distribution-invariant modification of the risk measure with a view to overcoming the existence of a good deal in a perfect market. The form of the minimal distribution-invariant modification of the risk measure is given in Theorem 5.1. The robustness of the minimal distribution-invariant modification of the risk measure is then studied in Section 6.