Equilibrium option pricing: A Monte Carlo approach

Axel Buchner

Finance Research Letters, 2015, vol. 15, issue C, 138-145

Abstract: This paper presents a novel Monte Carlo method for option pricing that is based on a general equilibrium model. The advantage of the method compared to the standard risk-neutral pricing approach is that it does not require the specification of a market price of risk, making the method particularly suitable for pricing in incomplete markets. The method produces a strongly consistent estimator for the option price which exhibits the same error convergence rate as the standard risk-neutral pricing Monte Carlo approach. For illustration, the procedure is applied to the pricing of options under stochastic volatility.

Keywords: Option pricing; Monte Carlo simulation; Stochastic volatility; Incomplete markets (search for similar items in EconPapers)
JEL-codes: C15 C63 D52 G13 (search for similar items in EconPapers)
Date: 2015
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Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:finlet:v:15:y:2015:i:c:p:138-145

DOI: 10.1016/j.frl.2015.09.004

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