On the pricing of options under limited information

Ann De Schepper () and Bart Heijnen

Working Papers from University of Antwerp, Faculty of Business and Economics

Abstract: In spite of the power of the Black & Scholes option pricing method, there are situations in which the hypothesis of a lognormal model is too restrictive. One possibility to deal with this problem, consists of a weaker hypothesis, fixing only successive moments and eventually the mode of the price process of a risky asset, and not the complete distribution. The consequence of this generalization is the fact that the option price is no longer a unique value, but a range of several possible values. We show how to find upper and lower bounds, resulting in a rather narrow range. We give results in case two moments, three moments, or two moments and the mode of the underlying price process are fixed.

Keywords: Black-Scholes; Option pricing; Limited information (search for similar items in EconPapers)
JEL-codes: C19 C65 E40 G13 (search for similar items in EconPapers)
Pages: 30 pages
Date: 2004-03
New Economics Papers: this item is included in nep-cfn, nep-fin and nep-rmg
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Persistent link: https://EconPapers.repec.org/RePEc:ant:wpaper:2004004

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