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

Author

Listed:
  • (*), 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)

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.

Suggested Citation

  • (*), Thaleia Zariphopoulou & George M. Constantinides, 1999. "Bounds on prices of contingent claims in an intertemporal economy with proportional transaction costs and general preferences," Finance and Stochastics, Springer, vol. 3(3), pages 345-369.
  • 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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    Keywords

    Contingent claim prices; bounds on prices; transaction costs; viscosity solutions;

    JEL classification:

    • C6 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling
    • D9 - Microeconomics - - Micro-Based Behavioral Economics
    • G1 - Financial Economics - - General Financial Markets

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