Derman and Taleb's The Illusions of Dynamic Replication: A Comment
AbstractWhile 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 InfoPaper provided by Boston University - Department of Economics in its series Boston University - Department of Economics - Working Papers Series with number WP2006-019.
Length: 05 pages
Date of creation: Mar 2006
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- Doriana Ruffino & Jonathan Treussard, 2006. "Derman and Taleb's 'The illusions of dynamic replication': a comment," Quantitative Finance, Taylor & Francis Journals, vol. 6(5), pages 365-367.
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