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On Option Pricing Models in the Presence of Heavy Tails


Vellekoop, Michel; Nieuwenhuis, Hans


Bitte beziehen Sie sich beim Zitieren dieses Dokumentes immer auf folgenden Persistent Identifier (PID):http://nbn-resolving.de/urn:nbn:de:0168-ssoar-220936

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Abstract 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.
Klassifikation Allgemeines, spezielle Theorien und "Schulen", Methoden, Entwicklung und Geschichte der Wirtschaftswissenschaften; Wirtschaftsstatistik, Ökonometrie, Wirtschaftsinformatik
Methode Theorieanwendung
Freie Schlagwörter Arbitrage Relationship; Financial Modelling; Pricing of Derivatives Securities; Stochastic Volatility
Sprache Dokument Englisch
Publikationsjahr 2007
Seitenangabe S. 563-573
Zeitschriftentitel Quantitative Finance, 7 (2007) 5
DOI http://dx.doi.org/10.1080/14697680601077967
Status Postprint; begutachtet (peer reviewed)
Lizenz PEER Licence Agreement (applicable only to documents from PEER project)