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- Title
Option Pricing and Market Efficiency.
- Authors
JARROW, ROBERT
- Abstract
This article dispels the common belief that option pricing and market efficiency are independent concepts, only weakly related at best. It shows that risk-neutral valuation, the standard approach for pricing derivatives, is true if (and only if) the market for the underlying asset is efficient with respect to the information set generating the price process's evolution. The article explores implications of this insight for standard derivative-pricing models, including the need to test for asset price bubbles before using such models.
- Subjects
DERIVATIVE securities; EFFICIENT market theory; VALUATION; CAPITAL assets pricing model; ECONOMIC bubbles; PRICES
- Publication
Journal of Portfolio Management, 2013, Vol 40, Issue 1, p88
- ISSN
0095-4918
- Publication type
Article
- DOI
10.3905/jpm.2013.40.1.088