Derivative Security Markets, Market Manipulation, and Option Pricing Theory
This paper studies a new theory for pricing options in a large trader economy. This theory necessitates studying the impact that derivative security markets have on market manipulation. In an economy with a stock, money market account, and a derivative security, it is shown, by example, that the introduction of the derivative security generates market manipulation trading strategies that would otherwise not exist. A sufficient condition is provided on the price process such that no additional market manipulation trading strategies are introduced by a derivative security. Options are priced under this condition, where it is shown that the standard binomial option model still applies but with random volatilities.
Volume (Year): 29 (1994)
Issue (Month): 02 (June)
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Web page: http://journals.cambridge.org/jid_JFQ
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.:
- Bagnoli, M. & Lipman, B., 1989.
"Stock Price Manipulation Through Takeover Bids,"
90-09, Michigan - Center for Research on Economic & Social Theory.
- Bernard Bensaid & Jean-Philippe Lesne & Henri Pagès & José Scheinkman, 1992. "Derivative Asset Pricing With Transaction Costs," Mathematical Finance, Wiley Blackwell, vol. 2(2), pages 63-86.
- Norbert Hofmann & Eckhard Platen & Martin Schweizer, 1992.
"Option Pricing Under Incompleteness and Stochastic Volatility,"
Wiley Blackwell, vol. 2(3), pages 153-187.
- N. Hofmann & E. Platen & M. Schweizer, 1992. "Option Pricing under Incompleteness and Stochastic Volatility," Discussion Paper Serie B 209, University of Bonn, Germany.
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