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It does create a see-saw. This can be reduced by having it charge a slightly bigger spread, which gets contributed to b. In this way, b effectively becomes a market making fund, and volatility decreases as trade volume increases. This makes the LMSR market maker liquidity sensitive. This makes the market more efficient as spreads decrease over time as ...


All the Fama-French data is downloadable here: http://mba.tuck.dartmouth.edu/pages/faculty/ken.french/data_library.html and in particular, daily RMRF, SMB and HML data can be downloaded here: http://mba.tuck.dartmouth.edu/pages/faculty/ken.french/ftp/F-F_Research_Data_Factors_daily.zip


Looking for the same issue, I found an article by de Jong(1997). In section 2 you can find a method for estimation of covariances and correlations between irregularly spaced data. Also look at the article by Jonas Andersson where some interpolation methods and method form de Jong are presented and compared together. Hope it helps.


This goes back to the so-called First Fundamental Theorem of Asset Pricing saying that markets are arbitrage free if and only if there exists at least an equivalent risk neutral measure. So the reason why we are using risk neutral measures to price options is because it allows us to represent discounted stock diffusions as martingales and therefore express ...

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