This paper develops an approach to tighten the bounds on asset pricing in an incomplete market
that combines no-arbitrage pricing and preference-based pricing, and the approach is applied to
call options without dynamic rebalancing. With the no-arbitrage pricing, it is straightforward
to obtain the initial bounds, which are too wide to be of practical uses. By accepting that
investors exhibit risk aversion from benchmark pricing kernels, it is possible to narrow the
bounds considerably. Using the minimax deviation implicit in the parameters, one can restrict
further the set of plausible values for call options on a stock.
JEL Classi…cation: G12; D52
Keywords: Incomplete Markets; Real Option; Minimax Deviation
