Derivative Security Markets, Market Manipulation, and Option Pricing Theory

Robert Jarrow ()

Chapter 7 in Financial Derivatives Pricing:Selected Works of Robert Jarrow, 2008, pp 131-151 from World Scientific Publishing Co. Pte. Ltd.

Abstract: AbstractThis paper studies a new theory for pricing options in a large trader economy. This theory necessitates studying the impact that derivative security markets have on market manipulation. In an economy with a stock, money market account, and a derivative security, it is shown, by example, that the introduction of the derivative security generates market manipulation trading strategies that would otherwise not exist. A sufficient condition is provided on the price process such that no additional market manipulation trading strategies are introduced by a derivative security. Options are priced under this condition, where it is shown that the standard binomial option model still applies but with random volatilities.

Keywords: Derivatives; Options; Hedging; HJM; Black–Scholes; Forwards; Futures; Martingale Measure; Calls; Puts; Market Manipulation; Margin Requirements (search for similar items in EconPapers)
Date: 2008
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Journal Article: Derivative Security Markets, Market Manipulation, and Option Pricing Theory (1994)
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