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Working papers
2025
European option pricing with market frictions and elicitation of probability distortion functions (Job-market paper)
Presentation: ADRES 2025 Job Market Conference, RUD 2024 (Risk Uncertainty & Decision, Northwestern University), EWET 2024 (European Workshop on Economic Theory, University of Manchester), RCEA 2024 (Rimini Centre for Economic Analysis, Brunel University), FMA Doctoral Student Consortium 2024 (Financial Management Association, ESCP Business School), seminar of the CES (Sorbonne Economics Centre) and seminar of the CEPS (Centre for Economics in Paris-Saclay).
This paper presents the representation of an asset pricing model assuming the absence of arbitrage, the existence of market frictions, and the Put-Call Parity. This model constitutes a special case of the Choquet Pricing Rule, where the non-additive probability measure (or capacity) is decomposed into an additive probability and an increasing weighting function. The necessary conditions for a Choquet Pricing Rule to be a Rank-Dependent Pricing Rule are given in the finite and the infinite cases. We test the empirical validity of the Put-Call and Call-Put Parities assumptions on Bid and Ask call option prices from the S&P500. The Rank-Dependent Pricing Rule is calibrated on the same data, utilizing two new families of distortion functions tailored for flexibility and two other functions referred to as (Generalized) Neo-Additive Capacity. We investigate the impact of time to expiration (time value) and moneyness (intrinsic value) on the shape of the distortion function. The resulting models (non-linear) always exhibit a greater accuracy than the benchmark (linear model).
Furthermore, the calibrated distortion functions display a remarkably similar shape. The results from the calibration procedure allow us, through the inverted S-shape distortion function, to conclude the risk-averse behaviour of the market markers in evaluating call options prices. Finally, we verify the robustness of the calibration on another dataset.
Job market paper.pdfMarket frictions and profitable arbitrage, with Jean-Philippe Lefort
Revise & Resubmit - Economic Theory
Presentation: PET 2022 (Association of Public Economic Theory, AMSE), AFSE 2022 (Association Française de Science Economique, Burgundy University)
Abstract: With both theoretical and empirical justifications, we show that the concept of arbitrage is not independent of the presence of market frictions. Hence, we extend the Fundamental Theorem of Finance by considering market frictions and introducing a new absence of arbitrage condition. This new absence of arbitrage condition involves trading strategies with buy-and-sell operations depending on the Bid-Ask spreads and leads to the development of two classes of pricing rules allowing for Bid-Ask spreads. By assuming Put-Call Parity, we get a Choquet pricing rule defined with respect to a non-monotonic set function. Under the sublinearity condition, we formulate a Multiple Priors pricing rule as the form of the maximum of a signed probability measure. Finally, we examine a specific case of non-monotonic Choquet pricing rules adapted for calibration.
AFAT.pdfDynamic Pricing Rules, with Jean-Philippe Lefort and Emy Lecuyer
We propose an extension of the fundamental theorem of finance that incorporates market frictions. This extension builds on the two-date Choquet pricing functions characterized by Cerreia-Vioglio, Maccheroni, and Marinacci (2015) and proposes a dynamic Choquet pricing rule. First, we prove the existence of an iterated Choquet Pricing Rule if and only if the partition is frictionless. Then, we show that having a frictionless partition is equivalent to having conditional and unconditional capacities defined with respect to a certain type of dynamic consistency. Therefore, we derive the conditional capacity by applying Bayes' theorem on the unconditional capacities. Finally, we show that it is possible to model a dynamic multiperiod pricing problem by a one-stage pricing problem when the filtration is frictionless.
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