IDEAS home Printed from https://ideas.repec.org/a/wsi/ijtafx/v08y2005i02ns0219024905002925.html
   My bibliography  Save this article

Calibrated Option Bounds

Author

Listed:
  • ALAN J. KING

    (IBM Research Division, Mathematical Sciences Department, Thomas J. Watson Research Center, PO Box 210, Yorktown Heights, NY 10598, USA)

  • MATTI KOIVU

    (Risk Management Division, European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany)

  • TEEMU PENNANEN

    (Department of Business Technology, Helsinki School of Economics, PL 1210, 00101 Helsinki, Finland)

Abstract

This paper proposes a numerical approach for computing bounds for the arbitrage-free prices of an option when some options are available for trading. Convex duality reveals a close relationship with recently proposed calibration techniques and implied trees. Our approach is intimately related to the uncertain volatility model of Avellaneda, Levy and Parás, but it is more general in that it is not based on any particular form of the asset price process and does not require the seller's price of an option to be a differentiable function of the cash-flows of the option. Numerical tests on S&P500 options demonstrate the accuracy and robustness of the proposed method.

Suggested Citation

  • Alan J. King & Matti Koivu & Teemu Pennanen, 2005. "Calibrated Option Bounds," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 8(02), pages 141-159.
  • Handle: RePEc:wsi:ijtafx:v:08:y:2005:i:02:n:s0219024905002925
    DOI: 10.1142/S0219024905002925
    as

    Download full text from publisher

    File URL: http://www.worldscientific.com/doi/abs/10.1142/S0219024905002925
    Download Restriction: Access to full text is restricted to subscribers

    File URL: https://libkey.io/10.1142/S0219024905002925?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Consiglio, Andrea & Zenios, Stavros A., 2018. "Pricing and hedging GDP-linked bonds in incomplete markets," Journal of Economic Dynamics and Control, Elsevier, vol. 88(C), pages 137-155.
    2. John Armstrong & Teemu Pennanen & Udomsak Rakwongwan, 2018. "Pricing Index Options By Static Hedging Under Finite Liquidity," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 21(06), pages 1-18, September.
    3. Consiglio, Andrea & De Giovanni, Domenico, 2008. "Evaluation of insurance products with guarantee in incomplete markets," Insurance: Mathematics and Economics, Elsevier, vol. 42(1), pages 332-342, February.
    4. John Armstrong & Teemu Pennanen & Udomsak Rakwongwan, 2018. "Pricing index options by static hedging under finite liquidity," Papers 1803.02486, arXiv.org.
    5. Martin Glanzer & Georg Ch. Pflug & Alois Pichler, 2017. "Incorporating statistical model error into the calculation of acceptability prices of contingent claims," Papers 1703.05709, arXiv.org, revised Jan 2019.
    6. Geyer, Alois & Hanke, Michael & Weissensteiner, Alex, 2014. "No-arbitrage bounds for financial scenarios," European Journal of Operational Research, Elsevier, vol. 236(2), pages 657-663.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:wsi:ijtafx:v:08:y:2005:i:02:n:s0219024905002925. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no bibliographic references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Tai Tone Lim (email available below). General contact details of provider: http://www.worldscinet.com/ijtaf/ijtaf.shtml .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.