Option Pricing Bounds in Discrete Time

Perrakis, Stylianos; Ryan, Peter

doi:10.2307/2327875

Cited by 47 publications

(51 citation statements)

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“…Turning the problem around, one can ask what are the highest and lowest option prices still compatible with a monotonically decreasing pricing kernel? This approach was developed in Perrakis and Ryan (1984) with the restrictions that the pricing kernel has to be positive, decreasing, and that it prices the stock and the bond and one reference option traded in the market. The resulting linear program then looks (for a call option with given strike price K) as follows:…”

Section: Bounds On Option Pricesmentioning

confidence: 99%

The Pricing Kernel Puzzle: Survey and Outlook

Cuesdeanu

Jackwerth

2016

SSRN Journal

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Section: Bounds On Option Pricesmentioning

confidence: 99%

The Pricing Kernel Puzzle: Survey and Outlook

Cuesdeanu

Jackwerth

2016

SSRN Journal

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“…Examples of the preference-based approach can be found in the literature on option pricing using preference restrictions, e.g., Perrakis and Ryan (1984), Levy (1985), Ritchken (1985), Ritchken and Kuo (1989), and Mathur and Ritchken (1999). In this stream of literature, coherent risk measures are similar to the valuation approach used by us (Artzner et al 1999).…”

Section: Literature Reviewmentioning

confidence: 99%

Securitization and Real Investment in Incomplete Markets

2011

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We study the impact of financial innovations on real investment decisions within the framework of an incomplete market economy comprised of firms, investors, and an intermediary. The firms face unique investment opportunities that arise in their business operations and can be undertaken at given reservation prices. The cash flows thus generated are not spanned by the securities traded in the financial market, and cannot be valued uniquely. The intermediary purchases claims against these cash flows, pools them together, and sells tranches of primary or secondary securities to the investors.We derive necessary and sufficient conditions under which projects are undertaken due to the intermediary's actions, and firms are amenable to the pool proposed by the intermediary, compared to the no-investment option or the option of forming alternative pools. We also determine the structure of the new securities created by the intermediary and identify how it exploits the arbitrage opportunities available in the market. Our results have implications for valuation of real investments, synergies among them, and their financing mechanisms. We illustrate these implications using an example of inventory decisions under random demand.

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“…4 See, for example, Perrakis and Ryan (1984), Levy (1985), Ritchken (1985), Ritchken and Kuo (1989) and Mathur and Ritchken (1999).…”

Section: Valuation In Incomplete Marketsmentioning

confidence: 99%

Market Incompleteness and Super Value Additivity: Implications for Securitization

2003

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In an incomplete market economy, all claim cannot be priced uniquely based on arbitrage. The prices of attainable claims (those that are spanned by traded claims) can be determined uniquely, whereas the prices of those that are unattainable can only be bounded. We first show that tighter price bounds can be determined by considering all possible portfolios of unattainable claims for which there are bid/offer prices. We provide an algorithm to establish these bounds. We then examine how a price-taking agent can "package" new assets in order to take advantage of the incompleteness since the market places a premium on claims that improve its spanning. In particular, we prove that a firm with a new investment opportunity can maximize its value by "stripping away" the maximal attainable portion of the cash flow, for which prices are determined uniquely, and selling the balance to investors at prices that preclude arbitrage. Our framework has several applications in financial economics to problems ranging from securitization to the valuation of real options. * The authors wish to thank Kose John, Roy Radner and Rangarajan Sundaram for suggestions made during this research.

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Option Pricing Bounds in Discrete Time

Cited by 47 publications

References 0 publications

The Pricing Kernel Puzzle: Survey and Outlook

The Pricing Kernel Puzzle: Survey and Outlook

Securitization and Real Investment in Incomplete Markets

Market Incompleteness and Super Value Additivity: Implications for Securitization

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