Journal of Financial and Quantitative Analysis Vol. 29 No. 2 1994
Derivative Security Markets, Market Manipulation, and Option Pricing Theory
Abstract
This paper studies a new theory for pricing options in a large trader economy. This theory necessitates studying the impact that derivative security markets have on market manipu? lation. In an economy with a stock, money market account, and a derivative security, it is shown, by example, that the introduction ofthe derivative security generates market manip? ulation trading strategies that would otherwise not exist. A sufficient condition is provided on the price process such that no additional market manipulation trading strategies are introduced by a derivative security. Options are priced under this condition, where it is shown that the standard binomial option model still applies but with random volatilities.
- DOI
- 10.2307/2331224
- Volume
- 29
- Issue
- 2
- Pages
- 241
- Sources
- openalex crossref