This paper presents a simple discrete-time model for valumg optlons. The fundamental econonuc principles of option pricing by arbitrage methods are particularly clear In this setting. Its development requires only elementary mathematics, yet it contains as a special limiting case the celebrated

The validity of the classic Black-Scholes option pricing formula dcpcnds on the capability of investors to follow a dynamic portfolio strategy in the stock that replicates the payoff structure to the option. The critical assumption required for such a strategy to be feasible, is that the underlying

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parameters are the drift of the Brownian motion and the volatility of the time change. These additional parameters provide control over the skewness and kurtosis of the return distribution. Closed forms are obtained for the return density and the prices of European options. The statistical and risk neutral

This paper provides a novel method to estimate β thoroughly based on option prices. Through combining the market model and the multivariate risk-neutral valuation relationship in Stapleton and Subrahmanyam (1984) and Câmara (2003), we develop a pricing model for individual stock options involving

dynamical model describing stock market

between loan guarantees and common stock put options, and then to use the well developed theory of option pricing to derive the formula. 1.

options on variance in affine stochastic volatility models

Abstract. We investigate which jump-diffusion models are convexity preserving. The study of convexity preserving models is motivated by monotonicity results for such models in the volatility and in the jump parameters. We give a necessary condition for convexity to be preserved in several-dimensional jump-diffusion models. This necessary condition is then used to show that, within a large class of possible models, the only convexity preserving models are the ones with linear coefficients. 1.

Brownian motion and normal distribution have been widely used in the Black–Scholes option-pricing framework to model the return of assets. However, two puzzles emerge from many empirical investigations: the leptokurtic feature that the return distribution of assets may have a higher peak and two