Unveiling the Secret Behind Option Pricing Volatility with Random Arbitrage
The article explores how random arbitrage opportunities affect the pricing of financial derivatives. By using a non-equilibrium model with rapidly changing random processes, the researchers developed a theory that sets pricing bands for options instead of exact prices. These pricing bands are not influenced by the specific statistical characteristics of the arbitrage return. The study also shows that the volatility "smile" in options pricing can be explained by random arbitrage opportunities.