A general framework for the derivation of asset price bounds: an application to stochastic volatility option models Authors
First Online: 16 April 2009 DOI:
Cite this article as: Bondarenko, O. & Longarela, I.R. Rev Deriv Res (2009) 12: 81. doi:10.1007/s11147-009-9032-7 Abstract
We present a generalization of Cochrane and Saá-Requejo’s good-deal bounds which allows to include in a flexible way the implications of a given stochastic discount factor model. Furthermore, a useful application to stochastic volatility models of option pricing is provided where closed-form solutions for the bounds are obtained. A calibration exercise demonstrates that our
benchmark good-deal pricing results in much tighter bounds. Finally, a discussion of methodological and economic issues is also provided. Keywords Option pricing Incomplete markets Good-deal bounds Benchmark stochastic discount factor Stochastic volatility model Continuous time References
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