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

Topics:
Investment and Capital Markets
Tags:
Financial Services,
National Bureau Of Economic Research,
Reservation,
Security
Source:
National Bureau of Economic Research

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Overview: 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 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.

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Format: PDF | Size: 826KB | Date: Apr 2002 | Pages: 58

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