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Bounds on prices of contingent claims in an intertemporal economy with proportional transaction costs and general preferences

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Author Info
(*), Thaleia Zariphopoulou (School of Business and Department of Mathematics, University of Wisconsin, Madison, WI 53706, USA Manuscript)
George M. Constantinides () (Graduate School of Business, The University of Chicago, 1101 East 58th Street, Chicago, IL 60637, USA)

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Abstract

Analytic bounds on the reservation write price of European-style contingent claims are derived in the presence of proportional transaction costs in a model which allows for intermediate trading. The option prices are obtained via a utility maximization approach by comparing the maximized utilities with and without the contingent claim. The mathematical tools come mainly from the theories of singular stochastic control and viscosity solutions of nonlinear partial differential equations.

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Publisher Info
Article provided by Springer in its journal Finance and Stochastics.

Volume (Year): 3 (1999)
Issue (Month): 3 ()
Pages: 345-369
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Handle: RePEc:spr:finsto:v:3:y:1999:i:3:p:345-369

Note: received: October 1997; final version received: August 1998
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Related research
Keywords: Contingent claim prices bounds on prices transaction costs viscosity solutions

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Find related papers by JEL classification:
C6 - Mathematical and Quantitative Methods - - Mathematical Methods and Programming
D9 - Microeconomics - - Intertemporal Choice and Growth
G1 - Financial Economics - - General Financial Markets

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  1. Bertram Düring & Michel Fournié & Ansgar Jüngel, 2001. "High order compact finite difference schemes for a nonlinear Black-Scholes equation," CoFE Discussion Paper 01-07, Center of Finance and Econometrics, University of Konstanz. [Downloadable!]
  2. Bertram Düring & Michel Fournié & Ansgar Jüngel, 2004. "Convergence of a high-order compact finite difference scheme for a nonlinear Black-Scholes equation," CoFE Discussion Paper 04-02, Center of Finance and Econometrics, University of Konstanz. [Downloadable!]
  3. George M. Constantinides & Stylianos Perrakis, 2002. "Stochastic Dominance Bounds on Derivative Prices in a Multiperiod Economy with Proportional Transaction Costs," NBER Working Papers 8867, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  4. Valeri Zakamouline, 2003. "European Option Pricing and Hedging with both Fixed and Proportional Transaction Costs," Finance 0311009, EconWPA. [Downloadable!]
  5. João Amaro de Matos & Paula Antão, 2001. "Super-replicating Bounds on European Option Prices when the Underlying Asset is Illiquid," Economics Bulletin, Economics Bulletin, vol. 7, pages 1-7. [Downloadable!]
  6. John S. Ying & Joel S. Sternberg, 2005. "The Impact of Serial Correlation on Option Prices in a Non- Frictionless Environment: An Alternative Explanation for Volatility Skew," Working Papers 05-12, University of Delaware, Department of Economics. [Downloadable!]
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