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Option pricing bounds and the elasticity of the pricing kernel

Huang, J (2002) Option pricing bounds and the elasticity of the pricing kernel. Working Paper. The Department of Accounting and Finance, Lancaster University.

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    Abstract

    In this paper we use isoelasticity functions as pricing kernels to derive option-pricing bounds. We give call (put) option pricing bounds depending on the bounds of the elasticity of the true pricing kernel by taking the spot stock price (the riskless interest rate) as given. The result potentially gives tighter upper call bound, which previous efforts have found difficult to achieve. We also show how to use the Black-Scholes formula to obtain option pricing bounds under the assumption of lognormaility. Moreover, we show that under our approach, the analysis for DARA (DRRA) bound can be simplified and generalized.

    Item Type: Monograph (Working Paper)
    Subjects:
    Departments: Lancaster University Management School > Accounting & Finance
    ID Code: 48623
    Deposited By: ep_importer_pure
    Deposited On: 11 Jul 2011 22:02
    Refereed?: No
    Published?: Published
    Last Modified: 27 Jul 2012 01:11
    Identification Number:
    URI: http://eprints.lancs.ac.uk/id/eprint/48623

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