Combining statistical intervals and market prices: The worst case state price distribution

Per Aslak Mykland

Journal of Econometrics, 2019, vol. 212, issue 1, 272-285

Abstract: The paper shows how to combine (historical) statistical data and (current) market prices to form conservative trading strategies for options. This gives rise to a “worst case” state price distribution, which provides sharp price bounds for all convex European options. The paper provides for existence and computational algorithms under conditions which can be understood as “no arbitrage”. The worst case distribution converges to a regular state price distribution if the number of traded options increases to span the space of possible option payouts.

Keywords: Incompleteness; Statistical uncertainty; Transport problem; Value at risk (search for similar items in EconPapers)
Date: 2019
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Persistent link: https://EconPapers.repec.org/RePEc:eee:econom:v:212:y:2019:i:1:p:272-285

DOI: 10.1016/j.jeconom.2019.04.030

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