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On the Internal Consistency of the Black-Scholes Option Pricing Model
2013
Theoretical Economics Letters
We study the information structure implied by models in which the asset price is always risky and there are no arbitrage opportunities. Using the martingale representation of Harrison and Kreps (1979), a claim takes its value from the stream of discounted expected payments. Equivalently, a stochastic discount factor (SDF) or pricing-kernel is sufficient to value the payment stream. If a price process is always risky, then either the payment or the discount factor must also be continually risky.
doi:10.4236/tel.2013.33032
fatcat:wqivn6xkargpnl2uyfnqv6j2y4