Trade-off Between Robust Risk Measurement and Market Principles
Recently, it was shown that coherent risk measures are not robust with respect to changes in large data. On the other hand, in this article, we show that robust risk measures always generate pathological financial positions, Good Deals. This leaves a decision maker with a problem to either choose a robust risk measurement approach in a day-to-day real life decision making or an approach, which can correctly price financial products by considering the market principals such as No Good Deal assumption. In this paper, after stating clearly this problem, we propose a solution by introducing the minimal distribution-invariant modification of the risk measure, which does not produce any Good Deal and also is more robust comparing to the family of coherent risk measures.
robustness risk measures good deals pricing rules representative agent hedging problem minimal modification 91b16 91b50 91b70