This article presents a new definition of market completeness that is independent of the notions of no arbitrage and equivalent martingale measures. Our definition has many advantages, all shown herein. First, it preserves the Second Fundamental Theorem of Asset Pricing, even in complex...

This paper investigates the relation between ex-dividend stock price behavior and arbitrage oppor tunities. In a continuous trading, frictionless economy, the authors demonstrate that it is possible for the ex-dividend stock price drop to differ from the dividend, and still short-term traders...

This article provides a new methodology for pricing and hedging derivative securities involving credit risk. Two types of credit risks are considered. The first is where the asset underlying the derivative security may default. The second is where the writer of the derivative security may...

This paper studies the impact that margin requirements have on both the existence of arbitrage opportunities and the valuation of ca ll options. In the context of the Black-Scholes economy, margin restr ictions are shown to exclude continuous-trading arbitrage opportuniti es, and with two...

This article provides a Markov model for the term structure of credit risk spreads. The model is based on Jarrow and Turnbull (1995), with the bankruptcy process following a discrete state space Markov chain in credit ratings. The parameters of this process are easily estimated using observable...

The downside risk in a leveraged stock position can be eliminated by using stop-loss orders. The upside potential of such a position can be captured using contingent buy orders. The terminal payoff to this stop-loss start-gain strategy is identical to that of a call option, but the strategy...

This paper provides a unified approach for pricing contingent claims on multiple term structures using a foreign currency analogy. All existing option pricing applications are seen to be special cases of this unified approach. This approach is used to price options on financial securities...