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Non-parametric Tests for the Martingale Restriction: A New Approach

Author

Listed:
  • Biao Guo
  • Qian Han
  • Doojin Ryu

Abstract

In this study, we use both parametric and non-parametric methods to test the property of martingale restriction in KOSPI 200 index options market. Our results provide strong evidence that the property is violated. Further regression analysis and robustness checks suggest that market friction factors can only marginally explain the relative percentage differences between the option-implied and market observed prices. Our results strongly suggest that there exist arbitrage opportunities in the KOSPI 200 options market.

Suggested Citation

  • Biao Guo & Qian Han & Doojin Ryu, 2013. "Non-parametric Tests for the Martingale Restriction: A New Approach," Working Papers 2013-10-14, Wang Yanan Institute for Studies in Economics (WISE), Xiamen University.
    • Handle: RePEc:wyi:wpaper:002034
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    File URL: https://econpub.xmu.edu.cn/research/repec/upload/2011629822337055475115776.docx
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    More about this item

    Keywords

    Martingale restriction; Emerging market; Arbitrage; Option pricing; Non-parametric; Risk-neutral density;
    All these keywords.

    JEL classification:

    • C14 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Semiparametric and Nonparametric Methods: General
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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