Bounding the values of financial derivatives by the use of the moment problem

Mariya Naumova () and András Prékopa
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Mariya Naumova: Rutgers The State University of New Jersey
András Prékopa: Rutgers The State University of New Jersey

Annals of Operations Research, 2021, vol. 305, issue 1, No 9, 225 pages

Abstract: Abstract Lower and upper bounds are derived on single-period European options under moment information, without assuming that the asset prices follow geometric Brownian motion, which is frequently untrue in practice. Sometimes the entire asset distribution is not completely known, sometimes it is known but the numerical calculation is easier by the use of the moments than the entire probability distribution. As geometric Brownian motion assumption regarding the asset prices is frequently untrue in practice. Some of the bounds are given by formulas, some are obtained by solving special linear programming problems. The bounds can be made close if a sufficiently large number of moments is used, and may serve for approximation of the values of financial derivatives.

Keywords: Discrete moment problem; European option pricing; Linear programming (search for similar items in EconPapers)
Date: 2021
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DOI: 10.1007/s10479-020-03839-7

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