Lancaster EPrints

Option bounds and second order arbitrage opportunities

Huang, J (2004) Option bounds and second order arbitrage opportunities. Working Paper. The Department of Accounting and Finance, Lancaster University.

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    Abstract

    In this paper we investigate the relationship between risk aversion and cautiousness, two important risk preference measures. We show how high cautiousness is associated with low risk aversion and how bounds and limits of cautiousness imply bounds and limits of relative risk aversion respectively. We also show how the monotonicity of cautiousness implies the monotonicity of risk aversion. Interestingly, we find that decreasing cautiousness implies standard risk aversion. We also reveal a close relationship between cautiousness and relative risk tolerance. These results help us better understand various conditions concerning risk aversion and cautiousness. They may also shed light on how investors' investment decisions in the equity and options markets are related.

    Item Type: Monograph (Working Paper)
    Uncontrolled Keywords: Option bounds ; option pricing ; stochastic dominance ; risk averse ; arbitrage opportunities
    Subjects: UNSPECIFIED
    Departments: Lancaster University Management School > Accounting & Finance
    ID Code: 48743
    Deposited By: ep_importer_pure
    Deposited On: 11 Jul 2011 22:09
    Refereed?: No
    Published?: Published
    Last Modified: 17 Sep 2013 18:26
    Identification Number:
    URI: http://eprints.lancs.ac.uk/id/eprint/48743

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