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Please use this identifier to cite or link to this item:
http://hdl.handle.net/2451/26854
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| Title: | No-Arbitrage Option Pricing: New Evidence on the Validity of the
Martingale Property |
| Authors: | Brenner, Menachem
Eom, Young Ho |
| Keywords: | Option Pricing
Martingale Pricing
Semi-Nonparametric Method |
| Issue Date: | Jun-1997 |
| Series/Report 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. |
| URI: | http://hdl.handle.net/2451/26854 |
| Appears in Collections: | Economics Working Papers
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