Option Pricing: Real and Risk-Neutral Distributions

Constantinides, George M.; Jackwerth, Jens; Perrakis, Stylianos

Option Pricing: Real and Risk-Neutral Distributions

Dateien

2007_Option_Pricing_Real_and_Risk_Neutral_Distributions.pdfGröße: 333.08 KBDownloads: 310

Datum

2007

Autor:innen

Constantinides, George M.

Jackwerth, Jens

Perrakis, Stylianos

Open Access-Veröffentlichung

Open Access Green

Sammlungen

Wirtschaftswissenschaften

Publikationstyp

Beitrag zu einem Sammelband

Publikationsstatus

Published

Erschienen in

BIRGE, John R., ed., Vadim LINETSKY, ed.. Financial Engineering. Amsterdam: Elsevier, 2007, pp. 565-591. Handbooks in Operations Research and Management Science. 15. ISBN 978-0-444-51781-4. Available under: doi: 10.1016/S0927-0507(07)15013-1

Zusammenfassung

The central premise of the Black and Scholes [Black, F., Scholes, M. (1973). The pricing of options and corporate liabilities. Journal of Political Economy 81, 637-659] and Merton [Merton, R. (1973). Theory of rational option pricing. Bell Journal of Economics and Management Science 4, 141-184] option pricing theory is that there exists a self-financing dynamic trading policy of the stock and risk free accounts that renders the market dynamically complete. This requires that the market be complete and perfect. In this essay, we are concerned with cases in which dynamic trading breaks down either because the market is incomplete or because it is imperfect due to the presence of trading costs, or both. Market incompleteness renders the risk-neutral probability measure non unique and allows us to determine the option price only within a range. Recognition of trading costs requires a refinement in the definition and usage of the concept of a risk-neutral probability measure. Under these market conditions, a replicating dynamic trading policy does not exist. Nevertheless, we are able to impose restrictions on the pricing kernel and derive testable restrictions on the prices of options.We illustrate the theory in a series of market setups, beginning with the single period model, the two-period model and, finally, the general multiperiod model, with or without transaction costs.We also review related empirical results that document widespread violations of these restrictions.

Fachgebiet (DDC)

330 Wirtschaft

Zitieren

ISO 690

CONSTANTINIDES, George M., Jens JACKWERTH, Stylianos PERRAKIS, 2007. Option Pricing: Real and Risk-Neutral Distributions. In: BIRGE, John R., ed., Vadim LINETSKY, ed.. Financial Engineering. Amsterdam: Elsevier, 2007, pp. 565-591. Handbooks in Operations Research and Management Science. 15. ISBN 978-0-444-51781-4. Available under: doi: 10.1016/S0927-0507(07)15013-1

BibTex

@incollection{Constantinides2007Optio-12234,
  year={2007},
  doi={10.1016/S0927-0507(07)15013-1},
  title={Option Pricing: Real and Risk-Neutral Distributions},
  number={15},
  isbn={978-0-444-51781-4},
  publisher={Elsevier},
  address={Amsterdam},
  series={Handbooks in Operations Research and Management Science},
  booktitle={Financial Engineering},
  pages={565--591},
  editor={BIrge, John R. and Linetsky, Vadim},
  author={Constantinides, George M. and Jackwerth, Jens and Perrakis, Stylianos}
}

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