Classical Option Pricing and Some Steps Further

Victor Olkhov

Papers from arXiv.org

Abstract: This paper considers the asset price p as relations C=pV between the value C and the volume V of the executed transactions and studies the consequences of this definition for the option pricing equations. We show that the classical BSM model implicitly assumes that value C and volume V of transactions follow identical Brownian processes. Violation of this identity leads to 2-dimensional BSM-like equation with two constant volatilities. We show that agents expectations those approve execution of transactions can further increase the dimension of the BSM model. We study the case when agents expectations may depend on the option price data and show that such assumption can lead to the nonlinear BSM-like equations. We reconsider the Heston stochastic volatility model for the price determined by the value and the volume and derive 3-dimensional BSM-like model with stochastic value volatility and constant volume volatility. Variety of the BSM-like equations states the problem of reasonable balance between the accuracy and the complexity of the option pricing equations.

Date: 2020-04, Revised 2021-02
New Economics Papers: this item is included in nep-fmk and nep-gen
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Citations: View citations in EconPapers (4)

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Related works:
Working Paper: Classical Option Pricing and Some Steps Further (2020)
Working Paper: Classical Option Pricing and Some Steps Further (2020)
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Persistent link: https://EconPapers.repec.org/RePEc:arx:papers:2004.13708

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