Semi-Efficient Valuations and Put-Call Parity
49 Pages Posted: 22 Jan 2016 Last revised: 30 Jun 2017
Date Written: June 15, 2017
We propose an approach to the valuation of payoffs in general semimartingale models of financial markets where prices are nonnegative. Each asset price can hit 0; we only exclude that this ever happens simultaneously for all assets. We start from two simple, economically motivated axioms, namely absence of arbitrage (in the sense of NUPBR) and absence of relative arbitrage among all buy-and-hold strategies (called static efficiency). A valuation process for a payoff is then called semi-efficient consistent if the financial market enlarged by that process still satisfies this combination of properties. It turns out that this approach lies in the middle between the extremes of valuing by risk-neutral expectation and valuing by absence of arbitrage alone. We show that this always yields put-call parity, although put and call values themselves can be nonunique, even for complete markets. We provide general formulas for put and call values in complete markets and show that these are symmetric and that both contain three terms in general. We also show that our approach recovers all the put-call parity respecting valuation formulas in the classic theory as special cases, and we explain when and how the different terms in the put and call valuation formulas disappear or simplify. Along the way, we also define and characterize completeness for general semimartingale financial markets and connect this to the classic theory.
Keywords: option valuation, put-call parity, absence of arbitrage, NUPBR, NFLVR, risk-neutral valuation, consistent valuation, maximal strategies, viability, efficiency, semi- efficient markets, completeness, incomplete markets
JEL Classification: G12, G13, C60
Suggested Citation: Suggested Citation