Expensive Martingales

25 Pages Posted: 10 Apr 2005

Multiple version iconThere are 2 versions of this paper

Date Written: January 2004

Abstract

We characterize strictly arbitrage-free markets of European options where only a discrete set of options is traded. We then construct martingales which reprice all given options and which are most expensive among all martingales with this property.

We also present algorithms to adjust real life market data and to construct expensive martingales while taking into account additional weak information: Estimated prices of more exotic products such as, for example, forward started options.

Keywords: Marginals, Martingale, Transition Probability, Balayage, Linear Programming, Discrete Pricing, Measures, Forward Started Options, European Options

JEL Classification: C60

Suggested Citation

Buehler, Hans, Expensive Martingales (January 2004). Available at SSRN: https://ssrn.com/abstract=687272 or http://dx.doi.org/10.2139/ssrn.687272

Hans Buehler (Contact Author)

JP Morgan ( email )

London
United Kingdom

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