As is well known, Arrow-Pratt measure of risk aversion explains investors' behavior in stock markets while Kimball's measure of prudence explains investors' behavior when they make precautionary savings. What is missing is a measure of investors' tendency to buy options. In this paper we show...

In this paper, we derive option bounds from concurrently expiring options assuming the representative investor has decreasing absolute (relative) risk aversion. We show that given the prices of the underlying stock and n concurrently expiring options, the DARA (DRRA) option bound is given by a...

In this paper we first present a geometric approach to option bounds. We show that if two risk neutral probability density functions intersect for certain number of times, then comparing the fatness of their tails we can tell which of them gives higher option prices. Thus we can derive option...

In this paper, we derive option bounds from concurrently expiring option prices assuming the (pricing) representative investor's relative risk aversion is bounded. We show that given n concurrently expiring options, the option bounds are given by pricing kernels that have (n+2)- segmented...

In this paper we first derive Nth order stochastic dominance option bounds from concurrently expiring options. We show that these bounds are given by pricing kernels that have piecewise constant (N-2)th derivatives. When these option bounds are violated there are Nth order arbitrage...

We generalize the concept of a risk-neutral valuation relationship in order to price options in cases where the restrictive conditions required for a traditional one-dimensional risk-neutral valuation relationship do not apply. We derive conditions under which a two-dimensional risk-neutral...

This note investigates the impact on option prices of divergent consumer confidence. To model this, we assume that consumers disagree on the expected growth rate of aggregate consumption. With other conditions unchanged in the discrete-time Black-Scholes option-pricing model, we show that the...

The three concepts, risk aversion, prudence, and cautiousness have interpretations for investor's main activities in financial markets, namely investment, saving, and hedging respectively. This paper investigates the relationships between these three concepts. It reveals that a more absolutely...

In this paper we raise a question on the theoretical foundation of option implied risk neutral density. We prove that given any number of options, there exist numerous risk neutral densities which are piecewise constant, have only two values, either an lower bound or an upper bound on the true...