Option pricing in the presence of extreme fluctuations

Jean-Philippe Bouchaud, Didier Sornette and Marc Potters ()
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Jean-Philippe Bouchaud: Science & Finance, Capital Fund Management
Didier Sornette: UCLA

No 500038, Science & Finance (CFM) working paper archive from Science & Finance, Capital Fund Management

Abstract: We discuss recent evidence that B. Mandelbrot's proposal to model market fluctuations as a Lévy stable process is adequate for short enough time scales, crossing over to a Brownian walk for larger time scales. We show how the reasoning of Black and Scholes should be extended to price and hedge options in the presence of these `extreme' fluctuations. A comparison between theoretical and experimental option prices is also given.

JEL-codes: G10 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cfn and nep-fin
Date: 1997-01
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Published in `Mathematics of derivative securities', M. Dempster and S. Pliska Edts, Cambridge University Press, Cambridge UK (1997)

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Persistent link: http://EconPapers.repec.org/RePEc:sfi:sfiwpa:500038

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