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

  • Doriana Ruffino

    ()

    (Boston University, Department of Economics)

  • Jonathan Treussard

    ()

    (Boston University, Department of Economics)

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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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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Web page: http://www.bu.edu/econ/

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  1. 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.
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  4. Jawwad Noor, 2006. "Menu-Dependent Self-Control," Levine's Bibliography 122247000000001061, UCLA Department of Economics.
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  7. 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.
  8. Jawwad Noor, 2005. "Commitment and Self-Control," Boston University - Department of Economics - Working Papers Series WP2005-014, Boston University - Department of Economics.
  9. 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.
  10. W. Pesendorfer & F. Gul, 1999. "Self-Control and the Theory of Consumption," Princeton Economic Theory Papers 99f2, Economics Department, Princeton University.
  11. Laibson, David, 1997. "Golden Eggs and Hyperbolic Discounting," The Quarterly Journal of Economics, MIT Press, vol. 112(2), pages 443-77, May.
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