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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
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Handle: RePEc:inm:ormnsc:v:43:y:1997:i:2:p:206-216