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Please use this identifier to cite or link to this item: http://hdl.handle.net/2451/26854

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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