Optimizing bounds on security prices in incomplete markets. Does stochastic volatility specification matter?
We extend and generalize some results on bounding security prices under two stochastic volatility models that provide closed-form expressions for option prices. In detail, we compute analytical expressions for benchmark and standard good-deal bounds. For both models, our findings show that our benchmark results generate much tighter bounds. A deep analysis of the properties of option prices and bounds involving a sensitivity analysis and analytical derivation of Greeks for both option prices and bounds is also presented. These results provide strong practical applications taking into account the relevance of pricing and hedging strategies for traders, financial institutions, and risk managers.
If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Tomas Björk & Irina Slinko, 2006. "Towards a General Theory of Good-Deal Bounds," Review of Finance, European Finance Association, vol. 10(2), pages 221-260.
- Lamoureux, Christopher G & Lastrapes, William D, 1993. "Forecasting Stock-Return Variance: Toward an Understanding of Stochastic Implied Volatilities," Review of Financial Studies, Society for Financial Studies, vol. 6(2), pages 293-326.
- Cox, John C & Ingersoll, Jonathan E, Jr & Ross, Stephen A, 1985. "A Theory of the Term Structure of Interest Rates," Econometrica, Econometric Society, vol. 53(2), pages 385-407, March.
- Heston, Steven L, 1993. "A Closed-Form Solution for Options with Stochastic Volatility with Applications to Bond and Currency Options," Review of Financial Studies, Society for Financial Studies, vol. 6(2), pages 327-43.
- Hansen, Lars Peter & Jagannathan, Ravi, 1991.
"Implications of Security Market Data for Models of Dynamic Economies,"
Journal of Political Economy,
University of Chicago Press, vol. 99(2), pages 225-62, April.
- Lars Peter Hansen & Ravi Jagannathan, 1990. "Implications of security market data for models of dynamic economies," Discussion Paper / Institute for Empirical Macroeconomics 29, Federal Reserve Bank of Minneapolis.
- Lars Peter Hansen & Ravi Jagannathan, 1990. "Implications of Security Market Data for Models of Dynamic Economies," NBER Technical Working Papers 0089, National Bureau of Economic Research, Inc.
- Black, Fischer & Scholes, Myron S, 1973. "The Pricing of Options and Corporate Liabilities," Journal of Political Economy, University of Chicago Press, vol. 81(3), pages 637-54, May-June.
- Oleg Bondarenko & Iñaki Longarela, 2009. "A general framework for the derivation of asset price bounds: an application to stochastic volatility option models," Review of Derivatives Research, Springer, vol. 12(2), pages 81-107, July.
- Albanese, Claudio & Tompaidis, Stathis, 2008. "Small transaction cost asymptotics and dynamic hedging," European Journal of Operational Research, Elsevier, vol. 185(3), pages 1404-1414, March.
- Nowak, Piotr & Romaniuk, Maciej, 2010. "Computing option price for Levy process with fuzzy parameters," European Journal of Operational Research, Elsevier, vol. 201(1), pages 206-210, February.
- Guenter Franke & James Huang & Richard Stapleton, 2006.
"Two-dimensional risk-neutral valuation relationships for the pricing of options,"
Review of Derivatives Research,
Springer, vol. 9(3), pages 213-237, November.
- Günter Franke & James Huang & Richard Stapleton, 2007. "Two-Dimensional Risk-Neutral Valuation Relationships for the Pricing of Options," CoFE Discussion Paper 07-08, Center of Finance and Econometrics, University of Konstanz.
- Reynaerts, Huguette & Vanmaele, Michele & Dhaene, Jan & Deelstra, Griselda, 2006. "Bounds for the price of a European-style Asian option in a binary tree model," European Journal of Operational Research, Elsevier, vol. 168(2), pages 322-332, January.
- Jizba, Petr & Kleinert, Hagen & Haener, Patrick, 2009. "Perturbation expansion for option pricing with stochastic volatility," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 388(17), pages 3503-3520.
- Cox, John C. & Ross, Stephen A. & Rubinstein, Mark, 1979. "Option pricing: A simplified approach," Journal of Financial Economics, Elsevier, vol. 7(3), pages 229-263, September.
- Basso, A. & Pianca, P., 2001. "Option pricing bounds with standard risk aversion preferences," European Journal of Operational Research, Elsevier, vol. 134(2), pages 249-260, October.
- PInar, Mustafa Ç. & Salih, AslIhan & CamcI, Ahmet, 2010. "Expected gain-loss pricing and hedging of contingent claims in incomplete markets by linear programming," European Journal of Operational Research, Elsevier, vol. 201(3), pages 770-785, March.
- Zuluaga, Luis F. & Peña, Javier & Du, Donglei, 2009. "Third-order extensions of Lo's semiparametric bound for European call options," European Journal of Operational Research, Elsevier, vol. 198(2), pages 557-570, October.
- Stein, Elias M & Stein, Jeremy C, 1991. "Stock Price Distributions with Stochastic Volatility: An Analytic Approach," Review of Financial Studies, Society for Financial Studies, vol. 4(4), pages 727-52.
When requesting a correction, please mention this item's handle: RePEc:eee:ejores:v:225:y:2013:i:3:p:429-442. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Zhang, Lei)
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.