Factor Models for Option Pricing

Peter Carr and Dilip Madan ()

Asia-Pacific Financial Markets, 2012, vol. 19, issue 4, 319-329

Abstract: Options on stocks are priced using information on index options and viewing stocks in a factor model as indirectly holding index risk. The method is particularly suited to developing quotations on stock options when these markets are relatively illiquid and one has a liquid index options market to judge the index risk. The pricing strategy is illustrated on IBM and Sony options viewed as holding SPX and Nikkei risk respectively. Copyright Springer Science+Business Media, LLC. 2012

Keywords: Variance gamma; Characteristic functions; Index options (search for similar items in EconPapers)
Date: 2012
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DOI: 10.1007/s10690-011-9151-7

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