Perrakis, S., "Stochastic Arbitrage in the Option Market: Survey, Synthesis, and New Results" | WEBINAR

June 23, 2022

Title: “Stochastic Arbitrage in the Option Market: Survey, Synthesis, and New Results” 

Speaker: Professor Stylianos Perrakis, The John Molson School of Business, Concordia University Montreal 

Host:  Professor Nikolas Topaloglou, Department of International and European Economic Studies, Athens University of Economics and Business

Time: 17.00 -18.30


Attachments: PDF icon PDF of Relevant Paper 

Abstact: We show that the stochastic dominance (SD) approach to the valuation of index options in frictionless markets allows the derivation of a unique variance risk premium and price of volatility risk based only on the underlying return and volatility dynamics for a wide class of stochastic volatility (SV) models. The SD approach also derives under similar conditions tight bounds on the admissible option prices in frictionless markets when there are independent jumps together with SV, the SVJ models. We demonstrate numerically by using published results from high profile studies the differences that our volatility risk prices yield in option values in comparison to prices extracted from observed option market data. We also present strategies that allow the profitable exploitation of the differences between model values and observed option market data and out-of-sample tests of the ex post profitability of such strategies in the frictionless world.

23/06/2022 - 17:00 - 18:30