Is there an informationally passive benchmark for option pricing incorporating maturity?
Vicky Henderson, David Hobson and Tino Kluge Quantitative Finance, 2007, vol. 7, issue 1, pages 75-86 Abstract: Figlewski proposed testing the incremental contribution of the Black-Scholes model by comparing its performance against an “informationally passive” benchmark, which was defined to be an option pricing formula satisfying static no-arbitrage constraints. In this paper we extend Figlewski’s analysis to include options of more than one maturity. Once maturity has been included in the model, any “informationally passive” call pricing function is consistent with some “active” model. In this sense, the notion of a passive model cannot be extended to pricing formulas incorporating option maturity. We derive the index dynamics of the active model implicit in Figlewski’s implied G example. These dynamics are far more complicated than the dynamics of the Samuelson-Black-Scholes or Bachelier models. The main implication of our analysis is that an appropriate benchmark for assessing opti
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