The aim of this paper is to discuss the no-arbitrage condition in option implied trees based on forward induction and to propose a no-arbitrage test that rules out the negative probabilities problem and hence enhances the pricing performance. The no-arbitrage condition takes into account two main features: the position of the node in the tree and the relation between the dividend yield and the risk-free rate. The proposed methodology is tested in and out of sample with Italian index options data and findings support a good pricing performance.

(2009). On the no-arbitrage condition in option implied trees [journal article - articolo]. In EUROPEAN JOURNAL OF OPERATIONAL RESEARCH. Retrieved from http://hdl.handle.net/10446/29079

On the no-arbitrage condition in option implied trees

MORIGGIA, Vittorio;MUZZIOLI, Silvia;
2009-01-01

Abstract

The aim of this paper is to discuss the no-arbitrage condition in option implied trees based on forward induction and to propose a no-arbitrage test that rules out the negative probabilities problem and hence enhances the pricing performance. The no-arbitrage condition takes into account two main features: the position of the node in the tree and the relation between the dividend yield and the risk-free rate. The proposed methodology is tested in and out of sample with Italian index options data and findings support a good pricing performance.
journal article - articolo
2009
Moriggia, Vittorio; Muzzioli, Silvia; Torricelli, Costanza
(2009). On the no-arbitrage condition in option implied trees [journal article - articolo]. In EUROPEAN JOURNAL OF OPERATIONAL RESEARCH. Retrieved from http://hdl.handle.net/10446/29079
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