Hakansson's Paradox

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In a 1979 article, published in the Journal of Financial and Quantitative Analysis, Hakansson raised the question of the redundancy of options. He argues that in an efficient market, it is always possible to replicate options through a portfolio of debt and assets. In that sense, they do not have a real economic value.

If we look at the other side of the problem, if options are not redundant, it would mean that there are market inefficiencies which made impossible that replication. In that case, as the market is not efficient, it would mean that it is impossible to value the option (option theory assumes a perfect market without frictions and arbitrage opportunities).

Thus in one case, options are needed but they can not be valued or they can be valued but useless. That's the Hakansson's paradox.


Hakansson N., 1979, "The Fantastic world of Finance: Progress and the free lunch", Journal of Financial and Quantitative Analysis, vol. 14, pp. 714-734