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Arbitrages and Arrow-Debreu Prices

Author

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  • Gaia Barone

    (Università LUISS “Guido Carli”)

Abstract

The goal of this work is to check that there are no arbitrage opportunities in the CBOE market for S&P500 options and to extract from these options’ quotes the state-price density consistent with the Merton model. The structure of the article is as follows: in Section 2 we examine the relations between arbitrages and Arrow-Debreu prices; in Section 3 we consider two models which seem to be consistent with the market prices of index options: the CEV model and the Merton model; finally, in Section 4 we estimate the state-price density consistent with the Merton-Geske model. Some conclusions follow.

Suggested Citation

  • Gaia Barone, 2008. "Arbitrages and Arrow-Debreu Prices," Rivista di Politica Economica, SIPI Spa, vol. 98(6), pages 43-78, November-.
    • Handle: RePEc:rpo:ripoec:v:98:y:2008:i:6:p:43-78
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    state-price density; index options; Merton-Geske model;
    All these keywords.

    JEL classification:

    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing

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