Black–Scholes option pricing within Itô and Stratonovich conventions

J Perelló, J.m Porrà, Miquel Montero () and J Masoliver

Physica A: Statistical Mechanics and its Applications, 2000, vol. 278, issue 1, 260-274

Abstract: Options are financial instruments designed to protect investors from the stock market randomness. In 1973, Black, Scholes and Merton proposed a very popular option pricing method using stochastic differential equations within the Itô interpretation. Herein, we derive the Black–Scholes equation for the option price using the Stratonovich calculus along with a comprehensive review, aimed to physicists, of the classical option pricing method based on the Itô calculus. We show, as can be expected, that the Black–Scholes equation is independent of the interpretation chosen. We nonetheless point out the many subtleties underlying Black–Scholes option pricing method.

Keywords: Option pricing; Black–Scholes theory; Stochastic calculus (search for similar items in EconPapers)
Date: 2000
References: View complete reference list from CitEc
Citations: View citations in EconPapers (2)

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0378437199006123
Full text for ScienceDirect subscribers only. Journal offers the option of making the article available online on Science direct for a fee of $3,000

Related works:
Working Paper: Black-Scholes option pricing within Ito and Stratonovich conventions (2000)
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:eee:phsmap:v:278:y:2000:i:1:p:260-274

DOI: 10.1016/S0378-4371(99)00612-3

Access Statistics for this article

Physica A: Statistical Mechanics and its Applications is currently edited by K. A. Dawson, J. O. Indekeu, H.E. Stanley and C. Tsallis

More articles in Physica A: Statistical Mechanics and its Applications from Elsevier
Bibliographic data for series maintained by Catherine Liu ().