Download or read book Stochastic Dominance Bounds on Option Prices in the Presence of Transaction Costs written by Michal Czerwonko and published by . This book was released on 2002 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt:

Download or read book Stochastic Dominance Option Pricing written by Stylianos Perrakis and published by Springer. This book was released on 2019-05-03 with total page 277 pages. Available in PDF, EPUB and Kindle. Book excerpt: This book illustrates the application of the economic concept of stochastic dominance to option markets and presents an alternative option pricing paradigm to the prevailing no arbitrage simultaneous equilibrium in the frictionless underlying and option markets. This new methodology was developed primarily by the author, working independently or jointly with other co-authors, over the course of more than thirty years. Among others, it yields the fundamental Black-Scholes-Merton option value when markets are complete, presents a new approach to the pricing of rare event risk, and uncovers option mispricing that leads to tradeable strategies in the presence of transaction costs. In the latter case it shows how a utility-maximizing investor trading in the market and a riskless bond, subject to proportional transaction costs, can increase his/her expected utility by overlaying a zero-net-cost portfolio of options bought at their ask price and written at their bid price, irrespective of the specific form of the utility function. The book contains a unified presentation of these methods and results, making it a highly readable supplement for educators and sophisticated professionals working in the popular field of option pricing. It also features a foreword by George Constantinides, the Leo Melamed Professor of Finance at the Booth School of Business, University of Chicago, USA, who was a co-author in several parts of the book.

Download or read book Transaction Costs and Stochastic Dominance Efficiency in the Index Futures Options Market written by Michal Czerwonko and published by . This book was released on 2006 with total page 45 pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper examines the stochastic dominance efficiency in the presence of transaction costs for Samp;P 500 index futures call and put options by estimating bounds on reservation write and reservation purchase prices and then verifying whether the observed option prices satisfy them. The bounds are estimated from data on past realizations of the underlying asset and under various data-based assumptions about the investor-assumed distribution of that asset. The bounds are then compared to observed market prices and several violations are identified under all distributional assumptions, although these violations are relatively few under forward-looking distributions. The paper then derives trading strategies that exploit these violations and increase expected utility for any risk averse investor. It develops a metric that evaluates the increase in expected utility for any given investor within a certain utility class and links it with the traditional second degree stochastic dominance criterion. Last, it demonstrates by out-of-sample tests with realized underlying asset prices that these strategies to exploit the mispricing of index futures options do indeed improve risk-adjusted returns for risk averse investors.

Download or read book The Stochastic Dominance Valuation of Options Under Transaction Costs written by Michal Czerwonko and published by . This book was released on 2008 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt:

Download or read book Stochastic Dominance Bounds on Derivative Prices in a Multiperiod Economy with Proportional Transaction Costs written by George M. Constantinides and published by . This book was released on 2002 with total page 56 pages. Available in PDF, EPUB and Kindle. Book excerpt: 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

Download or read book Can the Black Scholes Model Survive under Transaction Costs An Affirmative Answer written by Michal Czerwonko and published by . This book was released on 2008 with total page 37 pages. Available in PDF, EPUB and Kindle. Book excerpt: We examine the stochastic dominance bounds for call options in the presence of proportional transaction costs, developed in a discrete time and for a discrete or continuous state model of the returns of the underlying asset by Constantinides and Perrakis (CP, 2002, 2007). We consider a lognormal diffusion model of these returns and we formulate a discrete time trading version that converges to diffusion as the time partition becomes progressively more dense. Given the existence of a partition-independent and tight upper bound already derived in CP (2002), we focus on the lower bound, for which the results of that study were not available in a useful formulation. We then show that the CP lower bound for European call options converges to a non-trivial and tight limit that is a function of the transaction cost parameter. This limit defines a reservation purchase price under realistic trading conditions for the call options. The limit is a Black-Scholes type expression that becomes equal to the exact Black-Scholes value if the transaction cost parameter is set equal to zero, thus providing the only known generalization of the Black-Scholes model that produces useful results under transaction costs. We also develop a novel numerical algorithm that computes the CP lower bound for any discrete time partition and converges to the theoretical continuous time limit in a relatively small number of iterations. Last, we extend the lower bound results to American index options.

Download or read book On Stochastic Dominance Optionbounds in Discrete and Continuous Space and Time with Stochastic and Deterministic Volatility and Pricing with Constant Relative Risk Aversion written by Eli Rose and published by . This book was released on 2020 with total page 103 pages. Available in PDF, EPUB and Kindle. Book excerpt: This thesis makes original contributions to the field of asset pricing, which is a field dedicated to describing the prices of financial instruments and their characteristics. The prices of these financial instruments are determined by the behavior of investors who buy and sell them, and so asset pricing is ultimately done by modeling the behavior of investors. One method for achieving this is through the framework of stochastic dominance. This thesis specifically deals with a specific class of financial instruments called European options and reviews the literature on stochastic dominance option pricing and discusses new methods for finding stochastic dominance bounds on options in both discrete and continuous time under both deterministic and stochastic volatility. The results presented here extends the works of Ritchken and Kuo (1988) and Perrakis and Ryan (1984). Furthermore, stochastic dominance bounds for Heston's (1993) stochastic volatility model are obtained under certain assumptions. Finally, this thesis extends the work of Carr and Madan (1999) and solves for the characteristic function of the call price given the physical characteristic function under the CRRA utility model.

Download or read book Stochastic Dominance Bounds on Derivative Prices in a Multiperiod Economy with Proportial Transaction Costs written by George M. Constantinides and published by . This book was released on 2002 with total page 56 pages. Available in PDF, EPUB and Kindle. Book excerpt:

Download or read book Universal Bounds on Option Prices with Proportional Transaction Costs written by George M. Constantinides and published by . This book was released on 1995 with total page 64 pages. Available in PDF, EPUB and Kindle. Book excerpt:

Download or read book Stochastic dominance bounds on derivate prices in a multiperiod economy with proportional transaction costs written by George M. Constantinides and published by . This book was released on 2002 with total page 53 pages. Available in PDF, EPUB and Kindle. Book excerpt:

Download or read book Stochastic Dominance Option Pricing written by Ioan Mihai Oancea and published by . This book was released on 2006 with total page 0 pages. Available in PDF, EPUB and Kindle. Book excerpt: This thesis examines the pricing of options under several models with market incompleteness. The theoretical approach relies on the absence of stochastically dominating portfolios containing the underlying asset, the option and the riskless bond. The stochastic dominance approach provides two bounds on the equilibrium pricing of options by risk-averse investors. The two bounds are discounted conditional expectations of the option payoff under two probability measures. This research generalizes the previous stochastic dominance pricing results in discrete time to non-i.i.d. underlying asset return processes and to contingent claims with non-convex payoffs. The new results are then used to examine the stochastic dominance pricing bounds for several discrete and continuous time processes of the underlying asset. The continuous time bounds are obtained by constructing a sequence of discrete approximations that converge weakly to a given continuous time process. The weak convergence property provides the convergence of the two option bounds, which are discounted expectations of the option payoff. In the case of a univariate diffusion process, the two option bounds converge to a common limit. The two bounds converge to distinct limits when the underlying asset follows a jump-diffusion mixture. The non-iid stochastic dominance pricing results are then applied to the pricing of options for a LARCH specification of the underlying asset returns. The two stochastic dominance bounds are obtained both for conditional normal and non-normal returns. The impact of the model estimation error is examined by generating a return sample from a known model and computing the stochastic dominance bounds implied by several estimated models.

Download or read book Option Pricing Bounds with Transaction Costs written by George M. Constantinides and published by . This book was released on 1993 with total page 70 pages. Available in PDF, EPUB and Kindle. Book excerpt:

Download or read book Stochastic Dominance Option Pricing Bounds with Probability Weighting Functions written by 林友嵐 and published by . This book was released on 2020 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt:

Download or read book Option Pricing in the Presence of Transaction Costs written by Christopher John Danielian and published by . This book was released on 1997 with total page 104 pages. Available in PDF, EPUB and Kindle. Book excerpt:

Download or read book Stochastic Dominance and Option Pricing in Discrete and Continuous Time written by Ioan Mihai Oancea and published by . This book was released on 2007 with total page 48 pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper examines option pricing in a universe in which it is assumed that markets are incomplete. It derives multiperiod discrete time option bounds based on stochastic dominance considerations for a risk-averse investor holding only the underlying asset, the riskless asset and (possibly) the option for any type of underlying asset distribution, discrete or continuous. It then considers the limit behavior of these bounds for special categories of such distributions as trading becomes progressively more dense, tending to continuous time. It is shown that these bounds nest as special cases most, if not all, existing arbitrage- and equilibrium-based option pricing models. Thus, when the underlying asset follows a generalized diffusion both bounds converge to a single value. For jump-diffusion processes, stochastic volatility models, and GARCH processes the bounds remain distinct and define several new option pricing results containing as special cases the arbitrage-based results.

Download or read book Handbook of Stochastic Analysis and Applications written by D. Kannan and published by CRC Press. This book was released on 2001-10-23 with total page 808 pages. Available in PDF, EPUB and Kindle. Book excerpt: An introduction to general theories of stochastic processes and modern martingale theory. The volume focuses on consistency, stability and contractivity under geometric invariance in numerical analysis, and discusses problems related to implementation, simulation, variable step size algorithms, and random number generation.

Download or read book Option Pricing with Transaction Costs and Stochastic Volatility written by Emmanuel Kengni Ncheuguim and published by . This book was released on 2011 with total page 118 pages. Available in PDF, EPUB and Kindle. Book excerpt: