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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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.:
- Leland, Hayne E, 1980.
" Who Should Buy Portfolio Insurance?,"
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- Hayne E. Leland., 1979. "Who Should Buy Portfolio Insurance?," Research Program in Finance Working Papers 95, University of California at Berkeley.
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- Stephen A. Ross, 1976. "Options and Efficiency," The Quarterly Journal of Economics, Oxford University Press, vol. 90(1), pages 75-89.
- Stephen A. Ross, "undated". "Options and Efficiency," Rodney L. White Center for Financial Research Working Papers 3-74, Wharton School Rodney L. White Center for Financial Research.
- Stephen A. Ross, "undated". "Options and Efficiency," Rodney L. White Center for Financial Research Working Papers 03-74, Wharton School Rodney L. White Center for Financial Research.
- Brown, Donald J & Ross, Stephen A, 1991. "Spanning, Valuation and Options," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 1(1), pages 3-12, January.
- Donald J. Brown & Stephen A. Ross, 1988. "Spanning, Valuation and Options," Cowles Foundation Discussion Papers 873, Cowles Foundation for Research in Economics, Yale University.
- 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.
- Naik, Vasanttilak & Uppal, Raman, 1994. "Leverage Constraints and the Optimal Hedging of Stock and Bond Options," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 29(02), pages 199-222, June.
- Green, Richard C. & Jarrow, Robert A., 1987. "Spanning and completeness in markets with contingent claims," Journal of Economic Theory, Elsevier, vol. 41(1), pages 202-210, February. Full references (including those not matched with items on IDEAS)