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Arbitrages and Arrow-Debreu Prices

30 Pages Posted: 23 Apr 2008  

Gaia Barone

LUISS Guido Carli, Department of Business and Management

Date Written: March 28, 2008

Abstract

The goal of this work is to check that there are no arbitrage opportunities in the CBOE market for S&P500 options and to extract from their quotes the state-price density consistent with the Merton model. The structure of the article is as follows: in Section 1 we examine the relations between arbitrages and Arrow-Debreu prices; in Section 2 we consider two models which seem to be consistent with the market prices of index options: the CEV model and the Merton model; finally, in Section 3 we estimate the state-price density consistent with the Merton model. Some conclusions follow.

JEL Classification: G13

Suggested Citation

Barone, Gaia, Arbitrages and Arrow-Debreu Prices (March 28, 2008). Available at SSRN: https://ssrn.com/abstract=1124448 or http://dx.doi.org/10.2139/ssrn.1124448

Gaia Barone (Contact Author)

LUISS Guido Carli, Department of Business and Management ( email )

Viale Romania, 32
Rome, Rome 00197
Italy

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