Bounds on Derivative Prices in an Intertemporal Setting with Proportional Transaction Costs and Multiple Securities

38 Pages Posted: 26 Apr 2000

See all articles by George M. Constantinides

George M. Constantinides

University of Chicago - Booth School of Business; National Bureau of Economic Research (NBER)

Thaleia Zariphopoulou

University of Texas at Austin - Red McCombs School of Business

Date Written: July 1999

Abstract

The observed discrepancies of derivative prices from their theoretical, arbitrage-free values are examined in the presence of proportional transaction costs. Analytic upper and lower bounds on the reservation write and purchase prices, respectively, are obtained when an investor's preferences exhibit constant relative risk aversion between zero and one. The economy consists of multiple primary securities with the stationary returns, a constant rate of interest, and any number of American or European derivatives with path-dependent arbitrary payoffs. The price processes of the primary securities are modelled either as jump/diffusions in a continuous-time framework, or as arbitrary processes in a discrete-time framework.

Keywords: derivative pricing, transaction costs, multi-securities, american claims, exotic options, utility maximization, volatility smile.

JEL Classification: G13, G14, D84, D52

Suggested Citation

Constantinides, George M. and Zariphopoulou, Thaleia, Bounds on Derivative Prices in an Intertemporal Setting with Proportional Transaction Costs and Multiple Securities (July 1999). Available at SSRN: https://ssrn.com/abstract=214170 or http://dx.doi.org/10.2139/ssrn.214170

George M. Constantinides (Contact Author)

University of Chicago - Booth School of Business ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States
773-702-7258 (Phone)
773-752-0458 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Thaleia Zariphopoulou

University of Texas at Austin - Red McCombs School of Business ( email )

Austin, TX 78712
United States

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