2004

DOI: 10.2139/ssrn.622702

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DARA and DRRA Option Bounds from Concurrently Expiring Options

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Cited by 4 publications

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“…This paper is closely related to Huang (2004bHuang ( , 2004c. Huang (2004bHuang ( , 2004c improved higher order stochastic dominance option bounds and DARA (DRRA) option bounds by using the observed prices of concurrently expiring options.…”

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confidence: 99%

Option Bounds and Second Order Arbitrage Opportunities

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2009

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“…This paper is closely related to Huang (2004bHuang ( , 2004c. Huang (2004bHuang ( , 2004c improved higher order stochastic dominance option bounds and DARA (DRRA) option bounds by using the observed prices of concurrently expiring options.…”

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confidence: 99%

Option Bounds and Second Order Arbitrage Opportunities

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2009

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Stochastic Dominance Option Bounds and Nth Order Arbitrage Opportunities

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2004

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In this paper we first derive optimal N th order stochastic dominance option bounds from concurrently expiring options. These bounds are given by pricing kernels that have piecewise constant (N − 2)th derivatives.Using numerical examples we show that option bounds are improved significantly when we raise the order of stochastic dominance rules. When these option bounds are violated there are N th order arbitrage opportunities interpreted as the comparison of (weighted average) conditional expected returns. We then establish the way to make profits from these arbitrage opportunities in option markets.

Risk Neutral Probabilities and Option Bounds: A Geometric Approach

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2005

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In this paper we first present a geometric approach to option bounds. We show that if two risk neutral probability density functions intersect for certain number of times, then comparing the fatness of their tails we can tell which of them gives higher option prices. Thus we can derive option bounds by identifying the risk neutral probability density function which intersects all admissible ones for certain number of times. Applying this approach we tighten the first order stochastic dominance option bounds from concurrently expiring options when the maximum value of the risk neutral density are known.

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