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Option Bounds with Finite Revision Opportunities

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  • Ritchken, Peter H
  • Kuo, Shyanjaw

Abstract

This article generalizes the single-period linear programming option bound prices by allowing for a finite nu mber of revision opportunities. It is shown that, in an incomplete ma rket, the bounds on option prices can be derived using a modified bin omial option pricing model. Tighter bounds are developed under more r estrictive assumptions on probabilities and risk aversion. For this c ase, the upper bounds are shown to coincide with the upper bounds der ived by S. Perrakis, while the lower bounds are shown to be tighter. Copyright 1988 by American Finance Association.

Suggested Citation

  • Ritchken, Peter H & Kuo, Shyanjaw, 1988. "Option Bounds with Finite Revision Opportunities," Journal of Finance, American Finance Association, vol. 43(2), pages 301-308, June.
    • Handle: RePEc:bla:jfinan:v:43:y:1988:i:2:p:301-08
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    Citations

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    Cited by:

    1. Perrakis, Stylianos, 1989. "Les contributions de la théorie financière à la solution de problèmes en organisation industrielle et en microéconomie appliquée," L'Actualité Economique, Société Canadienne de Science Economique, vol. 65(4), pages 518-546, décembre.
    2. Flåm, Sjur, 2007. "Option Pricing by Mathematical Programming," Working Papers 2007:10, Lund University, Department of Economics.
    3. George M. Constantinides & Michal Czerwonko & Stylianos Perrakis, 2020. "Mispriced index option portfolios," Financial Management, Financial Management Association International, vol. 49(2), pages 297-330, June.
    4. Siddiqi, Hammad, 2015. "Anchoring Heuristic in Option Pricing," Risk and Sustainable Management Group Working Papers 207677, University of Queensland, School of Economics.
    5. Mariya Naumova & András Prékopa, 2021. "Bounding the values of financial derivatives by the use of the moment problem," Annals of Operations Research, Springer, vol. 305(1), pages 211-225, October.
    6. Constantinides, George M. & Perrakis, Stylianos, 2002. "Stochastic dominance bounds on derivatives prices in a multiperiod economy with proportional transaction costs," Journal of Economic Dynamics and Control, Elsevier, vol. 26(7-8), pages 1323-1352, July.
    7. Peter Christoffersen & Redouane Elkamhi & Bruno Feunou & Kris Jacobs, 2010. "Option Valuation with Conditional Heteroskedasticity and Nonnormality," The Review of Financial Studies, Society for Financial Studies, vol. 23(5), pages 2139-2183.
    8. Vishal Gaur & Sridhar Seshadri & Marti G. Subrahmanyam, 2011. "Securitization and Real Investment in Incomplete Markets," Management Science, INFORMS, vol. 57(12), pages 2180-2196, December.
    9. Hamed Ghanbari & Michael Oancea & Stylianos Perrakis, 2021. "Shedding light on a dark matter: Jump diffusion and option‐implied investor preferences," European Financial Management, European Financial Management Association, vol. 27(2), pages 244-286, March.
    10. Garivaltis, Alex, 2019. "Two resolutions of the margin loan pricing puzzle," Research in Economics, Elsevier, vol. 73(2), pages 199-207.
    11. John Handley, 2005. "On the Upper Bound of a Call Option," Review of Derivatives Research, Springer, vol. 8(2), pages 85-95, August.
    12. Hauser, Schmuel & Levy, Azriel, 1996. "Pricing of foreign exchange options with transaction costs: The choice of trading interval," International Review of Financial Analysis, Elsevier, vol. 5(2), pages 145-160.
    13. Perrakis, Stylianos & Boloorforoosh, Ali, 2013. "Valuing catastrophe derivatives under limited diversification: A stochastic dominance approach," Journal of Banking & Finance, Elsevier, vol. 37(8), pages 3157-3168.
    14. Siddiqi, Hammad, 2014. "Anchoring Heuristic in Option Prices," MPRA Paper 66018, University Library of Munich, Germany, revised 15 Jul 2015.
    15. Stylianos Perrakis & Ali Boloorforoosh, 2018. "Catastrophe futures and reinsurance contracts: An incomplete markets approach," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 38(1), pages 104-128, January.
    16. Constantinides, George M. & Jackwerth, Jens Carsten & Perrakis, Stylianos, 2005. "Option pricing: Real and risk-neutral distributions," CoFE Discussion Papers 05/06, University of Konstanz, Center of Finance and Econometrics (CoFE).
    17. Peter Ryan, 2000. "Tighter Option Bounds from Multiple Exercise Prices," Review of Derivatives Research, Springer, vol. 4(2), pages 155-188, May.
    18. Kamlesh Mathur & Peter Ritchken, 1999. "Minimum option prices under decreasing absolute risk aversion," Review of Derivatives Research, Springer, vol. 3(2), pages 135-156, May.
    19. Braouezec, Yann & Grunspan, Cyril, 2016. "A new elementary geometric approach to option pricing bounds in discrete time models," European Journal of Operational Research, Elsevier, vol. 249(1), pages 270-280.
    20. Stylianos Perrakis, 2022. "From innovation to obfuscation: continuous time finance fifty years later," Financial Markets and Portfolio Management, Springer;Swiss Society for Financial Market Research, vol. 36(3), pages 369-401, September.
    21. Thierry Post & Iňaki Rodríguez Longarela, 2021. "Risk Arbitrage Opportunities for Stock Index Options," Operations Research, INFORMS, vol. 69(1), pages 100-113, January.
    22. Ryan, Peter J., 2003. "Progressive option bounds from the sequence of concurrently expiring options," European Journal of Operational Research, Elsevier, vol. 151(1), pages 193-223, November.
    23. Siddiqi, Hammad, 2015. "Anchoring and Adjustment Heuristic in Option Pricing," MPRA Paper 68595, University Library of Munich, Germany.
    24. Hsuan-Chu Lin & Ren-Raw Chen & Oded Palmon, 2012. "Non-parametric method for European option bounds," Review of Quantitative Finance and Accounting, Springer, vol. 38(1), pages 109-129, January.
    25. Lim, Terence & Lo, Andrew W. & Merton, Robert C. & Scholes, Myron S., 2006. "The Derivatives Sourcebook," Foundations and Trends(R) in Finance, now publishers, vol. 1(5–6), pages 365-572, April.

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