Options Arbitrage in Imperfect Markets

摘要: Option valuation models are based on an arbitrage strategy-hedging the option against underlying asset and rebalancing continuously until expiration-that is only possible in a frictionless market. This paper simulates impact of market imperfections other problems with "standard" trade, including uncertain volatility, transactions costs, indivisibilities, at discrete intervals. We find that, actual such as that for stock index options, standard exposed to large risk costs it can establish very wide bounds equilibrium options prices. has important implications price determination markets, well testing models. AMONG ALL THEORIES IN finance, Black-Scholes pricing model perhaps had biggest real world securities trading. Virtually all participants aware use their decision making. Academics regularly test model's prices typically conclude while not every feature accounted for, works explaining observed prices.' Most argument. Under assumptions model, be combined into hedged position riskless local changes asset's time must therefore earn interest rate. leads theoretical value profitable ruled out. However, virtually traders theory most some way, mechanism assumed deriving cannot work same way does The disparity between practice subject this paper. Some made following. * follows logarithmic diffusion process