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

Biao Guo, Qian Han and Doojin Ryu

No 2013-10-14, Working Papers from Wang Yanan Institute for Studies in Economics (WISE), Xiamen University

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.

Keywords: Martingale restriction; Emerging market; Arbitrage; Option pricing; Non-parametric; Risk-neutral density (search for similar items in EconPapers)
JEL-codes: C14 G12 G13 G14 (search for similar items in EconPapers)
Date: 2013-10-14
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