Subjective Stochastic Dominance, Put Writing, and Stock Purchases with Extensions to Option Pricing and Portfolio Composition

Claude G. Henin and William F. Rentz
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Claude G. Henin: Faculty of Administration, University of Ottawa, Ottawa, Ontario, Canada K1N 9B5
William F. Rentz: Faculty of Administration, University of Ottawa, Ottawa, Ontario, Canada K1N 9B5

Management Science, 1985, vol. 31, issue 8, 919-927

Abstract: Initially an investor has the choice of two risky assets, writing a European put option or buying the underlying share. Under broad conditions a risk averse investor will be subjectively better off writing the put. When homogeneous expectations are invoked, an upper bound for the put premium is obtained. A numerical example using the lognormal density function illustrates the broad conditions for risk-averters subjectively preferring the put writing strategy. Additional conditions permit this preference for writing puts to be extended to the portfolio context. Transactions costs only reinforce this preference in the one-period horizon considered.

Keywords: investments; stochastic dominance; options; puts (search for similar items in EconPapers)
Date: 1985
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