Do S&P 500 index options violate the martingale restriction?

Norman Strong and Xinzhong Xu

Journal of Futures Markets, 1999, vol. 19, issue 5, 499-521

Abstract: The study tests Longstaff's martingale restriction on S&P 500 index options over the period 1990–1994. Assuming the S&P index follows a lognormal distribution results in systematic violations of the martingale restriction, the implied index value from options consistently overestimating the market value. Adopting a generalized distribution, allowing for nonnormal third and fourth moments, produces economically insignificant rejections of the martingale restriction. A simulation analysis supports the empirical results from the lognormal model in the presence of nonnormal skewness and kurtosis. Overall, the results support the conclusion that the no‐arbitrage assumption coupled with the generalized distribution offers a good working model for S&P index options over the period studied. © 1999 John Wiley & Sons, Inc. Jrl Fut Mark 19: 499–521, 1999

Date: 1999
References: Add references at CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
http://hdl.handle.net/

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:wly:jfutmk:v:19:y:1999:i:5:p:499-521

Ordering information: This journal article can be ordered from
http://www.blackwell ... bs.asp?ref=0270-7314

Access Statistics for this article

Journal of Futures Markets is currently edited by Robert I. Webb

More articles in Journal of Futures Markets from John Wiley & Sons, Ltd.
Bibliographic data for series maintained by Wiley Content Delivery ().