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Research output: Working paper
Research output: Working paper
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TY - UNPB
T1 - Risk neutral probabilities and option bounds: a geometric approach
AU - Huang, J
PY - 2004
Y1 - 2004
N2 - In this paper we first present a geometric approach to option bounds. We show that if two risk neutral probability density functions intersect for certain number of times, then comparing the fatness of their tails we can tell which of them gives higher option prices. Thus we can derive option bounds by identifying the risk neutral probability density function which intersects all admissible ones for certain number of times. Applying this approach we tighten the first order stochastic dominance option bounds from concurrently expiring options when the maximum value of the risk neutral density are known.
AB - In this paper we first present a geometric approach to option bounds. We show that if two risk neutral probability density functions intersect for certain number of times, then comparing the fatness of their tails we can tell which of them gives higher option prices. Thus we can derive option bounds by identifying the risk neutral probability density function which intersects all admissible ones for certain number of times. Applying this approach we tighten the first order stochastic dominance option bounds from concurrently expiring options when the maximum value of the risk neutral density are known.
KW - Option bounds
KW - option pricing
KW - risk neutral density
KW - first order stochastic dominance
M3 - Working paper
T3 - Accounting and Finance Working Paper Series
BT - Risk neutral probabilities and option bounds: a geometric approach
PB - The Department of Accounting and Finance
CY - Lancaster University
ER -