On Option Pricing Models in the Presence of Heavy Tails

Journal article | Zeitschriftenartikel

We propose a modification of the option pricing framework derived by Borland which removes the possibilities for arbitrage within this framework. It turns out that such arbitrage possibilities arise due to an incorrect derivation of the martingale transformation in the non-Gaussian option models which are used in that paper. We show how a similar model can be built for the asset price processes which excludes arbitrage. However, the correction causes the pricing formulas to be less explicit than the ones in the original formulation, since the stock price itself is no longer a Markov process. Practical option pricing algorithms will therefore have to resort to Monte Carlo methods or partial differential equations and we show how these can be implemented. An extra parameter, which needs to be specified before the model can be used, will give market makers some extra freedom when fitting their model to market data.

Object Details

• Extent: Seite(n): 563-573
• Language: Englisch
• Notes: Status: Postprint; begutachtet (peer reviewed)

References and Relationships

• Bibliographic citation: Quantitative Finance, 7(5)

Classification and Topics

• Subject: Wirtschaft ; Wirtschaftsstatistik, Ökonometrie, Wirtschaftsinformatik ; Allgemeines, spezielle Theorien und Schulen, Methoden, Entwicklung und Geschichte der Wirtschaftswissenschaften ; Theorieanwendung

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Vellekoop, Michel ; Nieuwenhuis, Hans
• Event: Veröffentlichung
• (where): Vereinigtes Königreich
• (when): 2007

Further information

• DOI: https://doi.org/10.1080/14697680601077967
• URN: urn:nbn:de:0168-ssoar-220936
• Rights: GESIS - Leibniz-Institut für Sozialwissenschaften. Bibliothek Köln
• Last update: 21.06.2024, 4:27 PM CEST