Call Option Price using Pearson Diffusion Processes

Tapan Kar, Suprio Bhar, Barun Sarkar and Sesha Meka

Papers from arXiv.org

Abstract: Following the foundational work of the Black--Scholes model, extensive research has been developed to price the option by addressing its underlying assumptions and associated pricing biases. This study introduces a novel framework for pricing European call options by modeling the underlying asset's return dynamics using Pearson diffusion processes, characterized by a linear drift and a quadratic squared diffusion coefficient. This class of diffusion processes offers a key advantage in its ability to capture the skewness and excess kurtosis of the return distribution, well-documented empirical features of financial returns. We also establish the validity of the risk-neutral measure by verifying the Novikov condition, thereby ensuring that the model does not admit arbitrage opportunities. Further, we study the existence of a unique strong solution of stock prices under the risk-neutral measure. We apply the proposed method to Nifty 50 index option data and conduct a comparative analysis against the classical Black--Scholes and Heston stochastic volatility models. Results indicate that our method shows superior performance compared to the other two benchmark models. These results carry practical implications for market participants, including market makers, hedge funds, and derivative traders.

Date: 2025-08
References: View complete reference list from CitEc
Citations:

Downloads: (external link)
http://arxiv.org/pdf/2508.14577 Latest version (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:arx:papers:2508.14577

Access Statistics for this paper

More papers in Papers from arXiv.org
Bibliographic data for series maintained by arXiv administrators ().