Stochastic Dominance Option Pricing

1. Front Matter

   Pages i-xxiii

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2. Stochastic Dominance: Introduction

   • Stylianos Perrakis

   Pages 1-17

3. Stochastic Dominance Option Pricing I: The Frictionless Case

   • Stylianos Perrakis

   Pages 19-85

4. Proportional Transaction Costs: An Introduction

   • Stylianos Perrakis

   Pages 87-109

5. Stochastic Dominance Option Pricing II: Option Bounds Under Transaction Costs

   • Stylianos Perrakis

   Pages 111-175

6. Stochastic Dominance Option Pricing: Empirical Applications

   • Stylianos Perrakis

   Pages 177-208

7. Stochastic Dominance and Further Theoretical and Empirical Option Research

   • Stylianos Perrakis

   Pages 209-252

8. Conclusions

   • Stylianos Perrakis

   Pages 253-260

9. Back Matter

   Pages 261-277

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This book illustrates the application of the economic concept of stochastic dominance to option markets and presents an alternative option pricing paradigm to the prevailing no arbitrage simultaneous equilibrium in the frictionless underlying and option markets. This new methodology was developed primarily by the author, working independently or jointly with other co-authors, over the course of more than thirty years. Among others, it yields the fundamental Black-Scholes-Merton option value when markets are complete, presents a new approach to the pricing of rare event risk, and uncovers option mispricing that leads to tradeable strategies in the presence of transaction costs. In the latter case it shows how a utility-maximizing investor trading in the market and a riskless bond, subject to proportional transaction costs, can increase his/her expected utility by overlaying a zero-net-cost portfolio of options bought at their ask price and written at their bid price, irrespective of the specific form of the utility function. The book contains a unified presentation of these methods and results, making it a highly readable supplement for educators and sophisticated professionals working in the popular field of option pricing. It also features a foreword by George Constantinides, the Leo Melamed Professor of Finance at the Booth School of Business, University of Chicago, USA, who was a co-author in several parts of the book.

• option bounds
• index options
• transaction costs
• derivatives market
• futures

• Financial Derivatives, John Molson School of Business, Concordia University, Montreal, QC, Canada

  Stylianos Perrakis

Stylianos Perrakis is the Royal Bank of Canada Distinguished Professor of Financial Derivatives at the John Molson School of Business, Concordia University, Canada. He has taught as a regular or visiting professor at universities in the USA, France, Switzerland and Greece. He is a Fellow of the Royal Society of Canada and the editor or associate editor of several finance and financial engineering journals. Perrakis is the author of Canadian Industrial Organization (Prentice-Hall Canada ,1990) and co-author of the textbook Investments, which is currently in its 8th edition.

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