TY - UNPB

T1 - Option pricing bounds and the elasticity of the pricing kernel

AU - Huang, J

PY - 2002

Y1 - 2002

N2 - In this paper we use isoelasticity functions as pricing kernels to derive option-pricing bounds. We give call (put) option pricing bounds depending on the bounds of the elasticity of the true pricing kernel by taking the spot stock price (the riskless interest rate) as given. The result potentially gives tighter upper call bound, which previous efforts have found difficult to achieve. We also show how to use the Black-Scholes formula to obtain option pricing bounds under the assumption of lognormaility. Moreover, we show that under our approach, the analysis for DARA (DRRA) bound can be simplified and generalized.

AB - In this paper we use isoelasticity functions as pricing kernels to derive option-pricing bounds. We give call (put) option pricing bounds depending on the bounds of the elasticity of the true pricing kernel by taking the spot stock price (the riskless interest rate) as given. The result potentially gives tighter upper call bound, which previous efforts have found difficult to achieve. We also show how to use the Black-Scholes formula to obtain option pricing bounds under the assumption of lognormaility. Moreover, we show that under our approach, the analysis for DARA (DRRA) bound can be simplified and generalized.

M3 - Working paper

T3 - Accounting and Finance Working Paper Series

BT - Option pricing bounds and the elasticity of the pricing kernel

PB - The Department of Accounting and Finance

CY - Lancaster University

ER -