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.
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Bondarenko, O., Longarela, I.R. A general framework for the derivation of asset price bounds: an application to stochastic volatility option models. Rev Deriv Res 12, 81–107 (2009). https://doi.org/10.1007/s11147-009-9032-7
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DOI: https://doi.org/10.1007/s11147-009-9032-7
Keywords
- Option pricing
- Incomplete markets
- Good-deal bounds
- Benchmark stochastic discount factor
- Stochastic volatility model
- Continuous time