Third-order extensions of Lo's semiparametric bound for European call options

Luis F. Zuluaga, Javier Peña and Donglei Du

European Journal of Operational Research, 2009, vol. 198, issue 2, 557-570

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 require strong assumptions about the underlying asset price distribution. We extend classical results in this area. Specifically, we derive closed-form semiparametric bounds for the payoff of a European call option, given up to third-order moment (i.e., mean, variance, and skewness) information on the underlying asset price. We analyze how these bounds tighten the corresponding bounds, when only second-order moment (i.e., mean and variance) information is provided. We describe applications of these results in the context of option pricing; as well as in other areas such as inventory management, and actuarial science.

Keywords: Applied; probability; Option; pricing; Inventory; management; Stop-loss; premium; Third; moment (search for similar items in EconPapers)
Date: 2009
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Citations: View citations in EconPapers (7)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:ejores:v:198:y:2009:i:2:p:557-570

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