Consistency of option prices under bid-ask spreads
Mathematical Finance
2019-07-17 v2
Abstract
Given a finite set of European call option prices on a single underlying, we want to know when there is a market model which 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 [S. Gerhold, I.C. G\"ul\"uum, arXiv:1512.06640].
Keywords
Cite
@article{arxiv.1608.05585,
title = {Consistency of option prices under bid-ask spreads},
author = {Stefan Gerhold and I. Cetin Gülüm},
journal= {arXiv preprint arXiv:1608.05585},
year = {2019}
}