Stochastic Dominance Bounds on Derivative Prices in a Multiperiod Economy with Proportional Transaction Costs
38 Pages Posted: 27 Dec 2000
Date Written: August 2000
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: Suggested Citation