OPTION PRICING WITH V. G. MARTINGALE COMPONENTS

Frank Milne and Dilip Madan

No 273635, Queen's Economics Department Working Papers from Queen's University - Department of Economics

Abstract: European call options are priced when the uncertainty driving the stock price follows the V. G. stochastic process (Madan and Seneta 1990). The incomplete markets equilibrium change of measure is approximated and identified using the log return mean. variance, and kurtosis. An exact equilibrium interpretation is also provided, allowing inference about relative risk aversion coefficients from option prices. Relative to Black-Scholes, V. G. option values are higher, particularly so for out of the money options with long maturity on stocks with high means. low variances, and high kurtosis.

Keywords: Financial; Economics (search for similar items in EconPapers)
Pages: 18
Date: 2008-10
References: Add references at CitEc
Citations:

Downloads: (external link)
https://ageconsearch.umn.edu/record/273635/files/qed_wp_1159.pdf (application/pdf)

Related works:
Working Paper: Option Pricing With V. G. Martingale Components (1991)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:ags:quedwp:273635

DOI: 10.22004/ag.econ.273635

Access Statistics for this paper

More papers in Queen's Economics Department Working Papers from Queen's University - Department of Economics Contact information at EDIRC.
Bibliographic data for series maintained by AgEcon Search ().