Chapter 7: Parametric, Semi-Parametric, and Non-Parametric Approaches for Option-Bound Determination: Review and Comparison

Based upon Ritchken (1985), Levy (1985), Lo (1987), Zhang (1994), Jackwerth and Rubinstein (1996), and others, this chapter discusses the alternative method to determine option bound in terms of the first two moments of distribution. This approach includes stochastic dominance method and linear programming method, then we discuss semi-parametric method and non-parametric method for option-bound determination. Finally, we incorporate both skewness and kurtosis explicitly through extending Zhang (1994) to provide bounds for the prices of the expected payoffs for options, given the first two moments and skewness and kurtosis.