Decreasing Absolute Risk Aversion and Option Pricing Bounds

Antonella Basso () and Paolo Pianca

Management Science, 1997, vol. 43, issue 2, 206-216

Abstract: In this paper efficient bounds for the price of a call option are obtained using the decreasing absolute risk aversion (DARA) dominance rule. Such lower and upper bounds are obtained minimizing and maximizing, respectively, the objective function of a nonlinear optimization problem. An explicit formula (related to an exponential utility function) is given for the special case of three states of nature. A large number of experiments have been carried out and the numerical results support the conjecture that the same formula holds for problems with a number of states n

Keywords: decreasing absolute risk aversion; option pricing; stochastic dominance; mathematical programming (search for similar items in EconPapers)
Date: 1997
References: Add references at CitEc
Citations: View citations in EconPapers (17)

Downloads: (external link)
http://dx.doi.org/10.1287/mnsc.43.2.206 (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:inm:ormnsc:v:43:y:1997:i:2:p:206-216

Access Statistics for this article

More articles in Management Science from INFORMS Contact information at EDIRC.
Bibliographic data for series maintained by Chris Asher ().