Decreasing Absolute Risk Aversion and Option Pricing Bounds

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 < 3. Moreover, DARA bounds are more efficient than the bounds obtained using different criteria.

• 저널Management Science · 43(2) · 206–216
• 토픽Capital Investment and Risk Analysis · Finance
• DOI10.1287/mnsc.43.2.206
• 저자Antonella Basso, Paolo Pianca