Please do not quote without permission * Chidambaran is visiting at NYU, on leave from Tulane. Lee holds joint appointments at Tulane and HKUST. Trigueros is at Tulane. We are grateful for the comments from participants at seminars at Tulane

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Abstract not found

Researchers have reported mispricing in index options markets. This study further examines the efficiency of the S&P 500 index options market by testing theoretical pricing relationships implied by no-arbitrage conditions. The effect of a traded stock basket, Standard and Poor's Depository Receipts (SPDRs), on the link between index and options markets is also examined. Pricing efficiency within options markets improves, and the evidence supports the hypothesis that a stock basket enhances the connection between markets. However, when transactions costs and short sales constraints are included, very few violations of the pricing relationships are reported.

This paper investigates the predictive power of implied variances extracted from the dollar/yen option prices. Implied variances are estimated from transaction prices of currency options traded on PHLX using the option pricing model of Garman and Kohlhagen (1983). In contrast to recent findings on stock and stock index options, the out-of-sample tests indicate that the implied variance is an upward biased estimator of future variance; and that the variance forecasts from GARCH and historical models do not contain significant incremental information in predicting future variance. Trading strategies are also developed to exploit the observed overstatement of variance in the dollar/yen option market. Traders that can execute the delta-neutral trading strategies at the observed market transaction prices could lock in a significant profits during the period examined. However, for investors that facing higher transaction costs, the magnitude of the profits is generally not large enough to al...

of the Dissertation Analytical Approximate Solution for the Prices of American Exotic Options. by Tatiana S. Taksar in Applied Mathematics and Statistics State University of New York at Stony Brook 1997 Dissertation Advisor: Professor Qiang Zhang In this thesis we will present analytical approximate solutions to the values of American barrier, lookback and Asian options. Both "out" barrier and "in" barrier options have been considered. At an "out" ("in") barrier, an option becomes worthless (starts to exist). A path-dependent option is an option iii whose payoff at exercise or maturity depends on the past history of the price of the underlying asset. Lookback options are one of the most common types of path-dependent options. They are path-dependent options whose payoff depends on the maximum or the minimum realized price of the underlying asset over the life of the option. Asian options are path-dependent options whose payoff depends on the average stock price observed during the li...

ABSTRACT This paper describes and analyses the history of the fundamental equation of modern financial economics: the Black-Scholes (or Black-Scholes-Merton) option pricing equation. In that history, several themes of potentially general importance are revealed. First, the key mathematical work was not rule-following but bricolage, creative tinkering. Second, it was, however, bricolage guided by the goal of finding a solution to the problem of option pricing analogous to existing exemplary solutions, notably the Capital Asset Pricing Model, which had successfully been applied to stock prices. Third, the central strands of work on option pricing, although all recognizably ‘orthodox ’ economics, were not unitary. There was significant theoretical disagreement amongst the pioneers of option pricing theory; this disagreement, paradoxically, turns out to be a strength of the theory. Fourth, option pricing theory has been performative. Rather than simply describing a preexisting empirical state of affairs, it altered the world, in general in a way that made itself more true.

participants at the 2000 European Financial Management Association Doctoral

This paper focuses on the Israeli currency options market, which includes currency options traded on the Tel Aviv Stock Exchange and (non-tradable) Bank of Israel currency options. The three aims of this study are: (a) To examine the null hypothesis that the Israeli currency options market is efficient, an issue that has not yet been thoroughly investigated. Ex-post tests of arbitrage and dominance conditions do not permit rejection of the null hypothesis, except for very-nearmaturity, deep-in-the-money (ITM) options. (b) To test the validity of the Black and Scholes (B-S) model as a native option-pricing model for the case of an exchange-rate target zone. We find that although we cannot reject the weakly efficient market hypothesis (except for very-near-maturity deep-ITM options), we can reject the strongly efficient market and/or the B-S model validity hypotheses. The banking sector could have utilized arbitrage opportunities, notably for out-ofthe-money, at-the-money, and far-from-maturity options, especially when employing inter-temporal weighted-average implied standard deviation. (c) To address the issue of the liquidity premium evaluation; this (rather surprisingly) is found to be negative for some options. This study extends previous studies of options by examining the efficiency of currency option markets and the validity of the Black and Scholes model under a target zone exchange rate regime. It also compares the performance of currency option trading on the exchange and over-the-counter for the same period.

volume indicates. Index options give market participants the ability to participate in anticipated market movements without having to buy or sell a large number of securities, and they permit portfolio managers to limit downside risk. Given their prominence and functions, the pricing efficiency of these markets is of great importance to academics, practitioners, and regulators. Well-functioning financial markets are vital to a thriving economy because these markets facilitate price discovery, risk hedging, and allocating capital to its most productive uses. Inefficient pricing of index options indicates that their market (and, possibly, other financial markets) is not doing the best possible job at these important functions. To detect