OPTION PRICING IN MARKETS WITH INFORMED TRADERS

Yuan Hu (), Abootaleb Shirvani (), Stoyan Stoyanov (), Young Shin Kim (), Frank J. Fabozzi and Svetlozar T. Rachev ()
Additional contact information
Yuan Hu: Department of Mathematics and Statistics, Texas Tech University, 1108 Memorial Circle, Lubbock, TX 79409-1042, USA
Abootaleb Shirvani: Department of Mathematics and Statistics, Texas Tech University, 1108 Memorial Circle, Lubbock, TX 79409-1042, USA
Stoyan Stoyanov: #x2020;Charles Schwab Corporation, 101 Montgomery St., San Francisco, CA 94104, USA
Young Shin Kim: #x2021;College of Business, Stony Brook University, 100 John S. Toll Drive, Stony Brook, NY 11794, USA
Frank J. Fabozzi: #xA7;EDHEC Business School, 393, Promenade des Anglais, BP3116, 06202 Nice Cedex 3, France
Svetlozar T. Rachev: Department of Mathematics and Statistics, Texas Tech University, 1108 Memorial Circle, Lubbock, TX 79409-1042, USA

International Journal of Theoretical and Applied Finance (IJTAF), 2020, vol. 23, issue 06, 1-32

Abstract: The objective of this paper is to introduce the theory of option pricing for markets with informed traders within the framework of dynamic asset pricing theory. We introduce new models for option pricing for informed traders in complete markets, where we consider traders with information on the stock price direction and stock return mean. The Black–Scholes–Merton option pricing theory is extended for markets with informed traders, where price processes are following continuous-diffusions. By doing so, the discontinuity puzzle in option pricing is resolved. Using market option data, we estimate the implied surface of the probability for a stock upturn, the implied mean stock return surface, and implied trader information intensity surface.

Keywords: Theory of option pricing; markets with informed traders; European call option prices for inform traders (search for similar items in EconPapers)
Date: 2020
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Citations: View citations in EconPapers (7)

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DOI: 10.1142/S0219024920500375

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