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

58 Pages Posted: 28 Mar 2002 Last revised: 27 Oct 2010

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: March 2002

Abstract

By applying stochastic dominance arguments, upper bounds on the reservation write price of European 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 is the derivation of bounds when intermediate trading in the underlying security is allowed over the life of the option. A tight upper bound is derived on the reservation write price of a call and a tight lower bound is derived on the reservation purchase price of a put. These results jointly impose tight upper and lower bounds on the implied volatility.

Suggested Citation

Constantinides, George M. and Perrakis, Stylianos, Stochastic Dominance Bounds on Derivative Prices in a Multiperiod Economy with Proportional Transaction Costs (March 2002). NBER Working Paper No. w8867. Available at SSRN: https://ssrn.com/abstract=305611

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

Stylianos Perrakis

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

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

Register to save articles to
your library

Register

Paper statistics

Downloads
27
Abstract Views
884
PlumX Metrics