Stochastic model for market stocks with floors

Javier Villarroel

Physica A: Statistical Mechanics and its Applications, 2007, vol. 382, issue 1, 321-329

Abstract: We present a model to describe the stochastic evolution of stocks that show a strong resistance at some level and generalize to this situation the evolution based upon geometric Brownian motion. If volatility and drift are related in a certain way we show that our model can be integrated in an exact way. The related problem of how to prize general securities that pay dividends at a continuous rate and earn a terminal payoff at maturity T is solved via the martingale probability approach.

Keywords: Option and derivative pricing; Econophysics; Stochastic differential equations (search for similar items in EconPapers)
Date: 2007
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Persistent link: https://EconPapers.repec.org/RePEc:eee:phsmap:v:382:y:2007:i:1:p:321-329

DOI: 10.1016/j.physa.2007.02.024

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