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Derman and Taleb's The Illusions of Dynamic Replication: A Comment

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  • Doriana Ruffino

    ()
    (Boston University, Department of Economics)

  • Jonathan Treussard

    ()
    (Boston University, Department of Economics)

Abstract

While as a matter of pure chance and mathematical manipulations, the Black- Scholes formula could have been accidentally obtained much earlier by making use of put-call parity, a simple thought experiment demonstrates the inconclusiveness of any such derivation as regards the validity of the resulting pricing equation. In particular, the use of a non-stochastic discount rate common to both the call and the put op- tions is inconsistent with modern equilibrium capital asset pricing theory. Additional observations are made.

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Bibliographic Info

Paper provided by Boston University - Department of Economics in its series Boston University - Department of Economics - Working Papers Series with number WP2006-019.

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Length: 05 pages
Date of creation: Mar 2006
Date of revision:
Handle: RePEc:bos:wpaper:wp2006-019

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References

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  1. Jawwad Noor, 2006. "Menu-Dependent Self-Control," Boston University - Department of Economics - Working Papers Series WP2006-021, Boston University - Department of Economics.
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  4. Per Krusell & Burhanettin Kuruscu & Anthony A. Smith, Jr., . "Time Orientation and Asset Prices," GSIA Working Papers 2001-13, Carnegie Mellon University, Tepper School of Business.
  5. Noor, Jawwad, 2007. "Commitment and self-control," Journal of Economic Theory, Elsevier, vol. 135(1), pages 1-34, July.
  6. Read, Daniel & van Leeuwen, Barbara, 1998. "Predicting Hunger: The Effects of Appetite and Delay on Choice, , , ," Organizational Behavior and Human Decision Processes, Elsevier, vol. 76(2), pages 189-205, November.
  7. Faruk Gul & Wolfgang Pesendorfer, 2004. "Self-Control and the Theory of Consumption," Econometrica, Econometric Society, vol. 72(1), pages 119-158, 01.
  8. Ted O'Donoghue & Matthew Rabin, 1996. "Doing It Now or Later," Discussion Papers 1172, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  9. W. Pesendorfer & F. Gul, 1999. "Temptation and Self-Control," Princeton Economic Theory Papers 99f1, Economics Department, Princeton University.
  10. John C. Harsanyi, 1955. "Cardinal Welfare, Individualistic Ethics, and Interpersonal Comparisons of Utility," Journal of Political Economy, University of Chicago Press, vol. 63, pages 309.
  11. Peleg, Bezalel & Yaari, Menahem E, 1973. "On the Existence of a Consistent Course of Action when Tastes are Changing," Review of Economic Studies, Wiley Blackwell, vol. 40(3), pages 391-401, July.
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Cited by:
  1. Nassim N. Taleb, 2014. "Risk Neutral Option Pricing With Neither Dynamic Hedging nor Complete Markets, A Measure-Theoretic Proof," Papers 1405.2609, arXiv.org.

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