DARA and DRRA option bounds from concurrently expiring options

Huang, J (2004) DARA and DRRA option bounds from concurrently expiring options. Working Paper. The Department of Accounting and Finance, Lancaster University.

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Abstract

In this paper we derive option bounds from concurrently expiring options assuming the representative investor has decreasing absolute {relative} risk aversion. We show that given the prices of the underlying stock and n concurrently expiring options, the DARA {DRRA} option bound is given by a representative investor who has piecewise constant absolute {relative} risk aversion. We also derive option bounds from concurrently expiring option prices assuming the representative investor has decreasing and bounded absolute {relative} risk aversion.