AcademicsWorking Papers

Non-parametric Tests for the Martingale Restriction: A New Approach
Biao Guo, Qian Han, Doojin Ryu
#002034 20131014 (published) Views:78
In this study, we use both parametric and non-parametric methods to test the property of martingale restriction in KOSPI 200 index options market. Our results provide strong evidence that the property is violated. Further regression analysis and robustness checks suggest that market friction factors can only marginally explain the relative percentage differences between the option-implied and market observed prices. Our results strongly suggest that there exist arbitrage opportunities in the KOSPI 200 options market.
JEL-Codes: C14; G12; G13; G14
Keywords: Martingale restriction; Emerging market; Arbitrage; Option pricing; Non-parametric; Risk-neutral density

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