A FORWARD LOOKING, SINGULAR PERTURBATION APPROACH TO PRICING OPTIONS UNDER MARKET UNCERTAINTY AND TRADING NOISE

Jorge R. Sobehart ()
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Jorge R. Sobehart: Citigroup Risk Architecture, 153 E 53rd St., NY 10022, USA

International Journal of Theoretical and Applied Finance (IJTAF), 2005, vol. 08, issue 05, 635-658

Abstract: In this article we examine the pricing of options when trading noise and uncertainty in the options markets invalidates the assumption that the price of the option depends solely on the price of the underlying security (or any set of underlying state variables). We show that the introduction of trading noise in the options market affects the call-put parity relationship, and can also contribute to generate implied volatility skews.

Keywords: Market uncertainty; trading noise; perturbation analysis; options pricing (search for similar items in EconPapers)
Date: 2005
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DOI: 10.1142/S0219024905003165

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