Article ID | Journal | Published Year | Pages | File Type |
---|---|---|---|---|
481747 | European Journal of Operational Research | 2009 | 10 Pages |
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.
Related Topics
Physical Sciences and Engineering
Computer Science
Computer Science (General)
Authors
V. Moriggia, S. Muzzioli, C. Torricelli,