A General Framework for the Derivation of Asset Price Bounds: An Application to Stochastic Volatility Option Models

29 Pages Posted: 14 Oct 2011 Last revised: 6 Apr 2015

See all articles by Oleg Bondarenko

Oleg Bondarenko

University of Illinois at Chicago - Department of Finance

Iñaki Rodríguez-Longarela

Stockholm University - Stockholm Business School; UiT-The Arctic University of Norway - School of Business and Economics

Date Written: March 1, 2009

Abstract

We present a generalization of Cochrane and Saá-Requejo’s good-deal bounds which allows to include in a flexible way the implications of a given stochastic discount factor model. Furthermore, a useful application to stochastic volatility models of option pricing is provided where closed-form solutions for the bounds are obtained. A calibration exercise demonstrates that our benchmark good-deal pricing results in much tighter bounds. Finally, a discussion of methodological and economic issues is also provided.

Keywords: Option Pricing, Incomplete Markets, Good-Deal Bounds, Benchmark Stochastic Discount Factor, Stochastic Volatility Model, Continuous Time

JEL Classification: C61, G12, G13

Suggested Citation

Bondarenko, Oleg and Rodríguez Longarela, Iñaki, A General Framework for the Derivation of Asset Price Bounds: An Application to Stochastic Volatility Option Models (March 1, 2009). Review of Derivatives Research, Vol. 12, pp. 81-107, 2009. Available at SSRN: https://ssrn.com/abstract=1943270 or http://dx.doi.org/10.2139/ssrn.1943270

Oleg Bondarenko (Contact Author)

University of Illinois at Chicago - Department of Finance ( email )

2431 University Hall (UH)
601 S. Morgan Street
Chicago, IL 60607-7124
United States
(312) 996-2362 (Phone)
(312) 413-7948 (Fax)

Iñaki Rodríguez Longarela

Stockholm University - Stockholm Business School ( email )

Stockholm
Sweden

UiT-The Arctic University of Norway - School of Business and Economics ( email )

Tromsø, 9037
Norway

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