TY  - JOUR
AU  - Constantinides,George M.
AU  - Perrakis,Stylianos
TI  - Stochastic Dominance Bounds on Derivative Prices in a Multiperiod Economy with Proportional Transaction Costs
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 8867
PY  - 2002
Y2  - March 2002
UR  - http://www.nber.org/papers/w8867
L1  - http://www.nber.org/papers/w8867.pdf
N1  - Author contact info:
George M. Constantinides
The University of Chicago
Booth School of Business
5807 South Woodlawn Avenue
Chicago, IL  60637
Tel: 773/702-7258
Fax: 773/753-8045
 (773) 753-8045
E-Mail: gmc@ChicagoBooth.edu

Stylianos Perrakis
Department of Finance
Concordia University
1455 de Maisonneuve Bvd. West.
Quebec, Canada H3G 1M8
E-Mail: SPerrakis@jmsb.concordia.ca
AB  - By applying stochastic dominance arguments, upper bounds on the reservation write price of European calls and puts and lower bounds on the reservation purchase price of these derivatives are derived in the presence of proportional transaction costs incurred in trading the underlying security.  The primary contribution is the derivation of bounds when intermediate trading in the underlying security is allowed over the life of the option.  A tight upper bound is derived on the reservation write price of a call and a tight lower bound is derived on the reservation purchase price of a put.  These results jointly impose tight upper and lower bounds on the implied volatility.
ER  -