Abstract

http://ssrn.com/abstract=1296404
 
 

Citations (7)



 


 



No-Arbitrage Option Pricing: New Evidence on the Validity of the Martingale Property


Menachem Brenner


New York University (NYU) - Department of Finance

Young Ho Eom


Yonsei University

June 1997

NYU Working Paper No. FIN-98-009

Abstract:     
The 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.

Number of Pages in PDF File: 42

Keywords: Option Pricing, Martingale Pricing, Semi-Nonparametric Method

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Date posted: November 7, 2008  

Suggested Citation

Brenner, Menachem and Eom, Young Ho, No-Arbitrage Option Pricing: New Evidence on the Validity of the Martingale Property (June 1997). NYU Working Paper No. FIN-98-009. Available at SSRN: http://ssrn.com/abstract=1296404

Contact Information

Menachem Brenner (Contact Author)
New York University (NYU) - Department of Finance ( email )
Stern School of Business
44 West 4th Street
New York, NY 10012-1126
United States
212-998-0323 (Phone)
212-995-4233 (Fax)
Young Ho Eom
Yonsei University ( email )
College of Business and Economics
Seoul 120-749
South Korea
+82 2 361 4193 (Phone)
+82 2 392 0504 (Fax)
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