Stochastic Dominance Bounds on Derivative Prices in a Multiperiod Economy with Proportional Transaction Costs

38 Pages Posted: 27 Dec 2000

See all articles by George M. Constantinides

George M. Constantinides

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

Stylianos Perrakis

Concordia University, Quebec - John Molson School of Business

Multiple version iconThere are 2 versions of this paper

Date Written: August 2000

Abstract

By applying stochastic dominance arguments, upper bounds on the reservation write price of calls and puts and lower bounds on the reservation purchase price of these derivatives are derived in the presence of proportional transaction costs incurred in trading the underlying security. The primary contribution of this paper is the derivation of bounds in the case that intermediate trading in the underlying security is allowed over the life of the option. Numerical examples illustrate that a tight bound is imposed on the reservation write price of a call option.

JEL Classification: C690, G130

Suggested Citation

Constantinides, George M. and Perrakis, Stylianos, Stochastic Dominance Bounds on Derivative Prices in a Multiperiod Economy with Proportional Transaction Costs (August 2000). Available at SSRN: https://ssrn.com/abstract=242608 or http://dx.doi.org/10.2139/ssrn.242608

George M. Constantinides

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

Stylianos Perrakis (Contact Author)

Concordia University, Quebec - John Molson School of Business ( email )

1455 de Maisonneuve Blvd. W.
Montreal, Quebec H3G 1M8
Canada

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