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DARA and DRRA option bounds from concurrently expiring options

Research output: Working paper

Published
Publication date2004
Place of PublicationLancaster University
PublisherThe Department of Accounting and Finance
Original languageEnglish

Publication series

NameAccounting and Finance Working Paper Series

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.