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Expensive martingales

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Author Info
Hans Buehler
Abstract

We characterize strictly arbitrage-free markets of European options where only a discrete set of options is traded. We then construct martingales which reprice all given options and which are 'most expensive’ among all martingales with this property. We also present algorithms to adjust real-life market data and to construct expensive martingales while taking into account additional 'weak’ information: estimated prices of more exotic products such as, for example, forward started options.

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Publisher Info
Article provided by Taylor and Francis Journals in its journal Quantitative Finance.

Volume (Year): 6 (2006)
Issue (Month): 3 (June)
Pages: 207-218
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Handle: RePEc:taf:quantf:v:6:y:2006:i:3:p:207-218

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Related research
Keywords: Marginal distribution; Transition kernel; Forward start options; Arbitrage;

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

  1. Wolfgang Härdle & Zdenek Hlavka, 2005. "Dynamics of State Price Densities," SFB 649 Discussion Papers SFB649DP2005-021, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany. [Downloadable!]
    Other versions:
  2. Heston, Steven L, 1993. "A Closed-Form Solution for Options with Stochastic Volatility with Applications to Bond and Currency Options," Review of Financial Studies, Oxford University Press for Society for Financial Studies, vol. 6(2), pages 327-43. [Downloadable!] (restricted)
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. René Carmona & Sergey Nadtochiy, 2009. "Local volatility dynamic models," Finance and Stochastics, Springer, vol. 13(1), pages 1-48, January. [Downloadable!] (restricted)
  2. Hans Buehler, 2006. "Consistent Variance Curve Models," Finance and Stochastics, Springer, vol. 10(2), pages 178-203, April. [Downloadable!] (restricted)
  3. A. Gulisashvili, 2009. "Asymptotic Formulas with Error Estimates for Call Pricing Functions and the Implied Volatility at Extreme Strikes," Quantitative Finance Papers 0906.0394, arXiv.org. [Downloadable!]
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