scientific article; zbMATH DE number 1069632
The present article aims at presenting general conditions that European options must satisfy under very broad assumptions, in particular concerning the distribution of the underlying asset. We do not suppose that the markets are complete, which means that we do not use duplication strategies to price options. If the market has homogeneous anticipations on the distribution of the underlying asset, we provide bounds in which all risk-averse investors agree to transact, each of them with a personal price that depends on his/her risk-aversion. These bounds on the options price are defined in order to prevent stochastic dominance of strategies with the same initial cost. It does not pretend to obtain necessarily the best possible bounds as we could possibly obtain more precise bounds by creating other comparisons between different strategies. Bounds on put prices can be achieved in the same way. In this article, since the distribution is general, the market is not supposed complete either. We do not try to find an equilibrium price for the option, as we do not suppose the present price for the stock to be an equilibrium price. It can be a transaction price. We are simply able to assert: according to the price of the underlying asset today, and the expectations for its distribution at time \(T\), the price at which any risk-averse individual agrees to transact is between two bounds. The approach we use is to obtain the minimum necessary conditions for the absence of second-order stochastic dominance between simple strategies. These considerations do not require complete markets. We make the hypothesis that investors are risk-averse, they have assumptions about future distributions of a stock, possibly subjective, and we define bounds on the options price in order to prevent stochastic dominance of strategies with the same initial cost. The article is organized as follows. Section 2 presents definitions and preliminary lemmas. Section 3 provides theoretical bounds on calls when the market is bullish and Section 4 when it is bearish. Section 5 provides results and comparisons with Black-Scholes calculations. Section 6 presents the conclusions. For the entire collection see [Zbl 0867.00036].
- Equilibrium pricing bounds on option prices
- On Stochastic Dominance and Decreasing Absolute Risk Averse Option Pricing Bounds
- Stochastic Dominance Bounds on American Option Prices in Markets with Frictions
- Bounds on European option prices under stochastic volatility
- Stochastic dominance bounds on derivatives prices in a multiperiod economy with proportional transaction costs.
This page was built for publication:
Report a bug (only for logged in users!)Click here to report a bug for this page (MaRDI item Q4356596)
