When the Black-Scholes assumptions hold market is instantaneously complete and options are redundant securities. This paper tests whether options are needed for spanning of the pricing kernel in addition to the risk-free bond and underlying asset in Korean stock index options market. Using Hansen's GMM estimation method, we find that pricing kernel cannot be spanned with the risk-free bond and underlying asset. Options are needed for spanning to incorporate the additional risk factor. This result is consistent with previous results using American options market data.
Hyun, J.S. and Rhee, B.K. (2004), "On the Incompleteness of Korean Stock Index Options Market", Journal of Derivatives and Quantitative Studies: 선물연구, Vol. 12 No. 2, pp. 25-43. https://doi.org/10.1108/JDQS-02-2004-B0002
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