A generalization of option pricing to price-limit markets

Jia-Hau Guo () and Lung-Fu Chang ()
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Jia-Hau Guo: National Chiao Tung University
Lung-Fu Chang: National Taipei University of Business

Review of Derivatives Research, 2020, vol. 23, issue 2, No 2, 145-161

Abstract: Abstract This paper proposes an analytic solution for pricing options in markets with daily price limits. The Black–Scholes model is a nested case in which the daily price limit approaches infinity. Compared to the Black–Scholes model, our solution may solve the mispricing problem and could yield consistent results with existing numerical methods. Practitioners trading options in price-limit markets may resort to the finite difference method or Monte Carlo simulations. However, applying these numerical methods is often time consuming, thereby further illustrating the importance of an analytic solution.

Keywords: Daily price limit; Analytic solution; Local times; Backward equation; Characteristic function; Fast Fourier transform (search for similar items in EconPapers)
JEL-codes: G13 (search for similar items in EconPapers)
Date: 2020
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DOI: 10.1007/s11147-019-09160-1

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