On the no-arbitrage condition in option implied trees

V. Moriggia, Silvia Muzzioli () and Costanza Torricelli

European Journal of Operational Research, 2009, vol. 193, issue 1, 212-221

Abstract: The aim of this paper is to discuss the no-arbitrage condition in option implied trees based on forward induction and to propose a no-arbitrage test that rules out the negative probabilities problem and hence enhances the pricing performance. The no-arbitrage condition takes into account two main features: the position of the node in the tree and the relation between the dividend yield and the risk-free rate. The proposed methodology is tested in and out of sample with Italian index options data and findings support a good pricing performance.

Keywords: Finance; No-arbitrage; condition; Binomial; tree; Implied; volatility; Calibration (search for similar items in EconPapers)
Date: 2009
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Citations: View citations in EconPapers (13)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:ejores:v:193:y:2009:i:1:p:212-221

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