Markets that don’t replicate any option

Markets that don’t replicate any option

It is well known from the work of S. Ross that a securities market is complete if and only if each call option can be replicated using available securities. The present short note announces the following surprising complementary result to Ross’ important contribution: • If the number of securities i...

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Veröffentlicht in:Economics letters 2002-08, Vol.76 (3), p.443-447
Hauptverfasser: Aliprantis, Charalambos D., Tourky, Rabee
Format: Artikel
Sprache:eng
Schlagworte:
Economics
Incomplete markets
Market
Option pricing
Option replication
Options
Portfolio analysis
Portfolio selection
Resolving securities
Securities issues
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Beschreibung
Zusammenfassung:It is well known from the work of S. Ross that a securities market is complete if and only if each call option can be replicated using available securities. The present short note announces the following surprising complementary result to Ross’ important contribution: • If the number of securities is less than half the number of states of the world, then (generically) not a single option can be replicated by traded securities. This provides further strong motivation for relaxing the assumption of a perfect market in the theory of option pricing and portfolio insurance.
ISSN:0165-1765
1873-7374
DOI:10.1016/S0165-1765(02)00084-8