Good deals and compatible modification of risk and pricing rules: A regulatory treatment

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.

Good deals and compatible modification of risk and pricing rules: A regulatory treatment Articles