No-Arbitrage Option Pricing: New Evidence on the Validity of the Martingale Property
AbstractThe no-arbitrage approach to option pricing implies that risk-neutral prices follow a martingale. The validity of this property has been tested and rejected by Longstaff (1995). Since he tested the general framework, his results have far reaching and disturbing implications for contingent claims pricing. This paper proposes a new method to test the martingale property. This method is based on the Laguerre polynomial series. The tests use options and futures on the S&P 500 index. The new methodology and data show that the martingale property cannot be rejected. This result implies that the general approach is still valid and the existence of frictions only adds noise. Testing more specific pricing models is relevant again.
Download InfoTo our knowledge, this item is not available for download. To find whether it is available, there are three options:
1. Check below under "Related research" whether another version of this item is available online.
2. Check on the provider's web page whether it is in fact available.
3. Perform a search for a similarly titled item that would be available.
Bibliographic InfoPaper provided by New York University, Leonard N. Stern School of Business- in its series New York University, Leonard N. Stern School Finance Department Working Paper Seires with number 98-009.
Date of creation: Jun 1997
Date of revision:
Contact details of provider:
Postal: U.S.A.; New York University, Leonard N. Stern School of Business, Department of Economics . 44 West 4th Street. New York, New York 10012-1126
Phone: (212) 998-0100
Web page: http://w4.stern.nyu.edu/finance/
More information through EDIRC
You can help add them by filling out this form.
CitEc Project, subscribe to its RSS feed for this item.
- David Backus & Silverio Foresi & Liuren Wu, 2002. "Accouting for Biases in Black-Scholes," Finance 0207008, EconWPA.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Thomas Krichel).
If references are entirely missing, you can add them using this form.