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Option bounds from concurrently expiring options when relative risk aversion is bounded

Research output: Working paper

Published
Publication date2004
Place of PublicationLancaster University
PublisherThe Department of Accounting and Finance
<mark>Original language</mark>English

Publication series

NameAccounting and Finance Working Paper Series

Abstract

In this paper we derive option bounds from concurrently expiring option prices assuming the (pricing) representative investor’s relative risk aversion is bounded. We show that given n concurrently expiring options, the option bounds are given by pricing kernels that have (n+2)-segmented piecewise constant elasticity. Closed form formulas are presented for the case where the distribution of the stock price is log-normal.