Extensions of Lo's semiparametric bound for European call options
Donglei Du (dduunb.ca)
Abstract: Computing semiparametric bounds for option prices is a widely studied pricing technique. In contrast to parametric pricing techniques, such as Monte-Carlo simulations, semiparametric pricing techniques do not re- quire strong assumptions about the underlying asset price distribution. We extend classical results in this area in two main directions. First, we derive closed-form semiparametric bounds for the payoŽ of a European call option, given up to third-order moment information on the underly- ing asset price. We analyze how these bounds tighten the corresponding bounds, when only second-order moment (i.e., mean and variance) infor- mation is provided. Second, we derive closed-form semiparametric bounds for the risk associated to the expected payoŽ of a European call option, when the mean and the variance of the underlying asset price is given. Applications of these results to other areas such as inventory and supply chain management are also discussed.
Keywords: Option bounds, option pricing, semiparametric bounds, tchebycheff inequalities.
Category 1: Applications -- OR and Management Sciences (Finance and Economics )
Category 2: Applications -- OR and Management Sciences (Supply Chain Management )
Citation: Working paper, Faculty of Business Administration, University of New Brunswick, December 2005.
Entry Submitted: 12/29/2005
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