The Use of Second-Order Stochastic Dominance To Bound European Call Prices: Theory and Results

Stochastic dominance arguments and the bounding of the generalized concave option price

“…Some simple lemmas are used in the proofs of the article, the proofs of which can be found in Henin and Pistre (1997). The lemmas are recalled in Appendix A.…”

“…Equations (10) and (11) can be calculated by iteration: Each potential price C 0 must verify these relations and is rejected if this is not the case. For numerical results in the "linear" case, see Henin and Pistre (1997).…”

“…Following Levy (1985), Henin and Pistre (1997) use this method to evaluate buying and selling reserve prices of classic European calls and found universal bounds for risk averse buyers and sellers. For a logarithmic Brownian motion of the underlying stock, the calculations are done for different expectations of the mean return, and they find the spread between the highest buying price and the lowest selling price, which is always tight.…”