Consistency of option prices under bid–ask spreads

Stefan Gerhold and Ismail Cetin Gülüm

Mathematical Finance, 2020, vol. 30, issue 2, 377-402

Abstract: Given a finite set of European call option prices on a single underlying, we want to know when there is a market model that is consistent with these prices. In contrast to previous studies, we allow models where the underlying trades at a bid–ask spread. The main question then is how large (in terms of a deterministic bound) this spread must be to explain the given prices. We fully solve this problem in the case of a single maturity, and give several partial results for multiple maturities. For the latter, our main mathematical tool is a recent result on approximation by peacocks.

Date: 2020
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