Option Pricing and Asset Valuation

Riccardo Cesari ()

Working Papers from Dipartimento Scienze Economiche, Universita' di Bologna

Abstract: In this paper we propose a simple, intuitive approach to asset valuation in terms of marginal contributions to the characteristics (moments) of the market portfolio. Considering only the first two moments, mean and variance, the valuation equation is shown to correspond to Sharpe s CAPM. A risk-neutral pricing formula is easily derived, showing the equivalence between CAPM and the Black and Scholes model. Extensions to higher moments like skewness and kurtosis are straightforward, providing a generalized valuation equation. Finally, the generalized equation is derived in a different, more rigorous way, as a result of a classical intertemporal general equilibrium model.

Date: 2003
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Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:bol:bodewp:467

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