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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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  • GEORGE M. CONSTANTINIDES
  • THALEIA ZARIPHOPOULOU

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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Paper provided by Center for Research in Security Prices, Graduate School of Business, University of Chicago in its series CRSP working papers with number 347.

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Handle: RePEc:wop:chispw:347

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Cited by:
  1. Lai, Tze Leung & Lim, Tiong Wee, 2009. "Option hedging theory under transaction costs," Journal of Economic Dynamics and Control, Elsevier, Elsevier, vol. 33(12), pages 1945-1961, December.
  2. Bertram Düring & Michel Fournié & Ansgar Jüngel, 2001. "High order compact finite difference schemes for a nonlinear Black-Scholes equation," CoFE Discussion Paper, Center of Finance and Econometrics, University of Konstanz 01-07, Center of Finance and Econometrics, University of Konstanz.
  3. Fehle, Frank, 2004. "A note on transaction costs and the existence of derivatives markets," Journal of Economics and Business, Elsevier, Elsevier, vol. 56(1), pages 63-70.
  4. Naio Ino & Afonso De Campos Pint, 2014. "Delta Hedge Com Custos Detransação: Uma Análise Comparativa," Anais do XLI Encontro Nacional de Economia [Proceedings of the 41th Brazilian Economics Meeting], ANPEC - Associação Nacional dos Centros de Pósgraduação em Economia [Brazilian Association of Gra 143, ANPEC - Associação Nacional dos Centros de Pósgraduação em Economia [Brazilian Association of Graduate Programs in Economics].
  5. Constantinides, George M. & Perrakis, Stylianos, 2002. "Stochastic dominance bounds on derivatives prices in a multiperiod economy with proportional transaction costs," Journal of Economic Dynamics and Control, Elsevier, Elsevier, vol. 26(7-8), pages 1323-1352, July.
  6. Damgaard, Anders, 2003. "Utility based option evaluation with proportional transaction costs," Journal of Economic Dynamics and Control, Elsevier, Elsevier, vol. 27(4), pages 667-700, February.
  7. João Amaro de Matos & Paula Antão, 2001. "Super-replicating Bounds on European Option Prices when the Underlying Asset is Illiquid," Economics Bulletin, AccessEcon, vol. 7(1), pages 1-7.
  8. Constantinides, George M. & Jackwerth, Jens Carsten & Perrakis, Stylianos, 2007. "Option Pricing: Real and Risk-Neutral Distributions," MPRA Paper 11637, University Library of Munich, Germany.
  9. 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, University of Delaware, Department of Economics 05-12, University of Delaware, Department of Economics.
  10. Valeri Zakamouline, 2003. "European Option Pricing and Hedging with both Fixed and Proportional Transaction Costs," Finance, EconWPA 0311009, EconWPA.
  11. Alet Roux, 2007. "The fundamental theorem of asset pricing under proportional transaction costs," Papers 0710.2758, arXiv.org.
  12. Maxim Bichuch, 2011. "Asymptotic Analysis for Optimal Investment in Finite Time with Transaction Costs," Papers 1112.2749, arXiv.org.
  13. Monoyios, Michael, 2004. "Option pricing with transaction costs using a Markov chain approximation," Journal of Economic Dynamics and Control, Elsevier, Elsevier, vol. 28(5), pages 889-913, February.
  14. Zakamouline, Valeri I., 2006. "European option pricing and hedging with both fixed and proportional transaction costs," Journal of Economic Dynamics and Control, Elsevier, Elsevier, vol. 30(1), pages 1-25, January.
  15. Maxim Bichuch, 2011. "Pricing a Contingent Claim Liability with Transaction Costs Using Asymptotic Analysis for Optimal Investment," Papers 1112.3012, arXiv.org.
  16. Damgaard, Anders & Fuglsbjerg, Brian & Munk, Claus, 2003. "Optimal consumption and investment strategies with a perishable and an indivisible durable consumption good," Journal of Economic Dynamics and Control, Elsevier, Elsevier, vol. 28(2), pages 209-253, November.
  17. Elettra Agliardi & Rainer Andergassen, 2011. "(S,s)-adjustment Strategies and Hedging under Markovian Dynamics," The Geneva Risk and Insurance Review, Palgrave Macmillan, vol. 36(2), pages 112-131, December.
  18. Mercurio, Fabio, 2001. "Claim pricing and hedging under market incompleteness and "mean-variance" preferences," European Journal of Operational Research, Elsevier, Elsevier, vol. 133(3), pages 635-652, September.
  19. Duffie, Darrell, 2003. "Intertemporal asset pricing theory," Handbook of the Economics of Finance, Elsevier, in: G.M. Constantinides & M. Harris & R. M. Stulz (ed.), Handbook of the Economics of Finance, edition 1, volume 1, chapter 11, pages 639-742 Elsevier.
  20. 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, Center of Finance and Econometrics, University of Konstanz 04-02, Center of Finance and Econometrics, University of Konstanz.

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