EconPapers    
Economics at your fingertips  
 

On Valuing European Option: VAR-COVAR Approach

Ahmad M. Talafha and Emmanuel Thompson

Journal of Finance and Investment Analysis, 2017, vol. 6, issue 3, 1

Abstract: Black and Scholes (B-S) in 1973 introduced the famous B-S formula for pricing a European-style stock option. The B-S formula depends on some assumptions that are too restrictive and cannot be entirely met. This paper relaxes some of the assumptions underpinning the BS model by deriving the equity price process within the framework of a vector autoregressive (VAR) model using stock market indices. The constant risk-free interest rate is replaced by a cointegrated VAR (COVAR) model using Treasury securities. Value of a European call option via Monte Carlo simulation is provided. We used antithetic and control variates as variance reduction techniques to improve upon the accuracy of our simulation.Mathematics Subject Classification: G12; C15; G22Keywords: Option pricing; Vector Autoregressive; Cointegrated Vector Autoregressive; Monte Carlo; Antithetic Variates; Control Variates

Date: 2017
References: View references in EconPapers View complete reference list from CitEc
Citations Track citations by RSS feed

Downloads: (external link)
http://www.scienpress.com/Upload/JFIA%2fVol%206_3_1.pdf (application/pdf)

Related works:
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:spt:fininv:v:6:y:2017:i:3:f:6_3_1

Access Statistics for this article

More articles in Journal of Finance and Investment Analysis from SCIENPRESS Ltd
Series data maintained by Eleftherios Spyromitros-Xioufis ().

 
Page updated 2017-09-29
Handle: RePEc:spt:fininv:v:6:y:2017:i:3:f:6_3_1