Research output: Working paper
Research output: Working paper
}
TY - UNPB
T1 - Stochastic dominance option bounds and Nth order arbitrage opportunities
AU - Huang, J
PY - 2004
Y1 - 2004
N2 - In this paper we first derive Nth order stochastic dominance option bounds from concurrently expiring options. We show that these bounds are given by pricing kernels that have piecewise constant (N - 2)th derivatives. When these option bounds are violated there are Nth order arbitrage opportunities interpreted as (weighted average) conditional expected return comparison. We then establish a way to explore these arbitrage opportunities in option markets.
AB - In this paper we first derive Nth order stochastic dominance option bounds from concurrently expiring options. We show that these bounds are given by pricing kernels that have piecewise constant (N - 2)th derivatives. When these option bounds are violated there are Nth order arbitrage opportunities interpreted as (weighted average) conditional expected return comparison. We then establish a way to explore these arbitrage opportunities in option markets.
KW - Option bounds
KW - option pricing
KW - stochastic dominance
M3 - Working paper
T3 - Accounting and Finance Working Paper Series
BT - Stochastic dominance option bounds and Nth order arbitrage opportunities
PB - The Department of Accounting and Finance
CY - Lancaster University
ER -