Third-order extensions of Lo's semiparametric bound for European call options.(Report) Zuluaga, Luis F.; Peña, Javier; Du, Donglei

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Authors
Zuluaga, Luis F. ; Peña, Javier ; Du, Donglei
Appears In
European Journal of Operational Research
Subjects
Inventory control -- Analysis; Pricing -- Analysis; Business, general
Audience
Academic; Trade
Summary
To link to full-text access for this article, visit this link: http://dx.doi.org/10.1016/j.ejor.2008.09.019 Byline: Luis F. Zuluaga (a), Javier Pena (b), Donglei Du (a) Keywords: Applied probability; Option pricing; Inventory management; Stop-loss premium; Third moment Abstract: Computing semiparametric bounds for option prices is a widely studied pricing technique. In contrast to parametric pricing techniques, such as Monte-Carlo simulations, semiparametric pricing techniques do not require strong assumptions about the underlying asset price distribution. We extend classical results in this area. Specifically, we derive closed-form semiparametric bounds for the payoff of a European call option, given up to third-order moment (i.e., mean, variance, and skewness) information on the underlying asset price. We analyze how these bounds tighten the corresponding bounds, when only second-order moment (i.e., mean and variance) information is provided. We describe applications of these results in the context of option pricing; as well as in other areas such as inventory management, and actuarial science. Author Affiliation: (a) Faculty of Business Administration, University of New Brunswick, P.O. Box 4400, Fredericton, NB, Canada E3B 5A3 (b) Tepper School of Business, Carnegie Mellon University, 5000 Forbes Avenue, Pittsburgh, PA 15213, USA Article History: Received 19 January 2008; Accepted 18 September 2008
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http://trove.nla.gov.au/work/9794
Work ID
9794

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