SFB 303 Discussion Paper No. B - 128
Author: Müller, Sigrid M.
Title: Stock Price Distributions, Perfect Option Hedging, and Complete Markets
Abstract: This paper determines the class of stock price distributions that allow
for arbitrage pricing (perfect hedging) of all European call options using
only the underlying stock and a riskless asset in a continuous-time trading
model. First the case of stationary return dynamics is considered. It is
shown that the model must be of either the Brownian motion or the Poisson
type. Then the non-stationary case is considered and a complete
characterization of stock price processes with this property is provided.
Several examples are given to show the importance of this result.
Creation-Date: November 1989
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