Bounds on Derivative Prices in an Intertemporal Setting with Proportional Transaction Costs and Multiple Securities

George Constantinides and Thaleia Zariphopoulou

Mathematical Finance, 2001, vol. 11, issue 3, 331-346

Abstract: The observed discrepancies of derivative prices from their theoretical, arbitrage‐free values are examined in the presence of transaction costs. Analytic upper and lower bounds on the reservation write and purchase prices, respectively, are obtained when an investor's preferences exhibit constant relative risk aversion between zero and one. The economy consists of multiple primary securities with stationary returns, a constant rate of interest, and any number of American or European derivatives with, possibly, path‐dependent arbitrary payoffs.

Date: 2001
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