The effect of non-ideal market conditions on option pricing

Josep Perelló and Jaume Masoliver

Physica A: Statistical Mechanics and its Applications, 2002, vol. 308, issue 1, 420-442

Abstract: Option pricing is mainly based on ideal market conditions which are well represented by the geometric Brownian motion (GBM) as market model. We study the effect of non-ideal market conditions on the price of the option. We focus our attention on two crucial aspects appearing in real markets: the influence of heavy tails and the effect of colored noise. We will see that both effects have opposite and non-trivial consequences on option pricing.

Date: 2002
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Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:phsmap:v:308:y:2002:i:1:p:420-442

DOI: 10.1016/S0378-4371(02)00627-1

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