Markets That Don'T Replicate Any Option
It is well known from the work of S. Ross that a securities market is complete if and only if each call option can be replicated using available securities. The present short note announces the following surprising complementary result to Ross' important contribution. . If the number of securities is less than half the number of states of the world, then not a single option can be replicated by traded securities. This provides further strong motivation for relaxing the assumption of a perfect market in the theory of option pricing and portfolio insurance.
|Date of creation:||2002|
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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.:
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- Broadie, Mark & Cvitanic, Jaksa & Soner, H Mete, 1998. "Optimal Replication of Contingent Claims under Portfolio Constraints," Review of Financial Studies, Society for Financial Studies, vol. 11(1), pages 59-79.
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