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Stochastic dominance bounds on option prices in the presence of transaction costs : an empirical approach

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Stochastic dominance bounds on option prices in the presence of transaction costs : an empirical approach

Czerwonko, Michal (2002) Stochastic dominance bounds on option prices in the presence of transaction costs : an empirical approach. Masters thesis, Concordia University.

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Abstract

This paper investigates the multi-period upper bound on the European call price in the presence of transaction costs derived by Constantinides-Perrakis (2002). Numerical results verifying an assumption of the monotonictity of wealth of the call writer in the underlying asset on which the Constantinides-Perrakis (2002) model relies are derived, and it is shown that the assumption is satisfied for relatively small ratios of stock to option account. The classic second order stochastic dominance argument is applied to the dynamic trading in discrete time in the S&P 500 options under the portfolio selection criteria in the presence of transaction costs. It is shown that the improvement in expected utility does occur under the prescribed investment policy in the S&P 500 calls whose prices exceed the bound. Under the lognormality of the S&P 500 price process, the quantitative improvement in expected utility is derived.

Divisions:Concordia University > John Molson School of Business
Item Type:Thesis (Masters)
Authors:Czerwonko, Michal
Pagination:vii, 89 leaves : ill. ; 29 cm.
Institution:Concordia University
Degree Name:Theses (M.Sc.Admin.)
Program:John Molson School of Business
Date:2002
Thesis Supervisor(s):Perrakis, Stylianos
ID Code:1965
Deposited By:Concordia University Libraries
Deposited On:27 Aug 2009 13:24
Last Modified:08 Dec 2010 10:23
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