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Arbitrage, Continuous Trading, and Margin Requirements

Author

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  • Heath, David C
  • Jarrow, Robert A

Abstract

This paper studies the impact that margin requirements have on both the existence of arbitrage opportunities and the valuation of ca ll options. In the context of the Black-Scholes economy, margin restr ictions are shown to exclude continuous-trading arbitrage opportuniti es, and with two additional hypotheses, to still allow the Black-Scho les call model to apply. The Black-Scholes economy consists of a cont inuously-traded stock whose price process follows a geometric Brownia n motion and a continuously-traded bond whose price process is determ inistic. Copyright 1987 by American Finance Association.

Suggested Citation

  • Heath, David C & Jarrow, Robert A, 1987. "Arbitrage, Continuous Trading, and Margin Requirements," Journal of Finance, American Finance Association, vol. 42(5), pages 1129-1142, December.
  • Handle: RePEc:bla:jfinan:v:42:y:1987:i:5:p:1129-42
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    Cited by:

    1. Santa-Clara, Pedro & Saretto, Alessio, 2009. "Option strategies: Good deals and margin calls," Journal of Financial Markets, Elsevier, vol. 12(3), pages 391-417, August.
    2. Chin‐Ho Chen, 2021. "Investor sentiment, misreaction, and the skewness‐return relationship," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 41(9), pages 1427-1455, September.
    3. Feyzullah Egriboyun & H. Soner, 2010. "Optimal investment strategies with a reallocation constraint," Mathematical Methods of Operations Research, Springer;Gesellschaft für Operations Research (GOR);Nederlands Genootschap voor Besliskunde (NGB), vol. 71(3), pages 551-585, June.
    4. Alessandro Fiori Maccioni, 2011. "Endogenous Bubbles in Derivatives Markets: The Risk Neutral Valuation Paradox," Papers 1106.5274, arXiv.org, revised Sep 2011.
    5. Yuan Zhou & Zhe Wu, 2013. "Mean-Variance Portfolio Selection with Margin Requirements," Journal of Mathematics, Hindawi, vol. 2013, pages 1-9, April.
    6. A. Fiori Maccioni, 2011. "The risk neutral valuation paradox," Working Paper CRENoS 201112, Centre for North South Economic Research, University of Cagliari and Sassari, Sardinia.
    7. Lim, Terence & Lo, Andrew W. & Merton, Robert C. & Scholes, Myron S., 2006. "The Derivatives Sourcebook," Foundations and Trends(R) in Finance, now publishers, vol. 1(5–6), pages 365-572, April.

    More about this item

    JEL classification:

    • B26 - Schools of Economic Thought and Methodology - - History of Economic Thought since 1925 - - - Financial Economics
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy

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