Pricing options on assets with predictable white noise returns

Angel Leon and Enrique Sentana

LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library

Abstract: We study the effect of predictability of an asset's return on the prices of options on that asset, for models in which returns are serially uncorrelated, yet predictable on the basis of a larger information set. We show that return predictability may matter in a discrete time world, especially for longer maturity options. However, discrepancies between the frequency of trading and observation become relevant in estimating the model parameters. When trading is continuous, Black-Scholes is valid, and the sample variance of holding returns over finite periods is an appropriate estimator of the variance of instantaneous returns.

JEL-codes: G10 G12 (search for similar items in EconPapers)
Pages: 17 pages
Date: 1997-07-01
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http://eprints.lse.ac.uk/119177/ Open access version. (application/pdf)

Related works:
Working Paper: Pricing Options on Assets with Predictable White Noise Returns (1997)
Working Paper: Pricing Options on Assets with Predictable White Noise Returns (1997)
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Persistent link: https://EconPapers.repec.org/RePEc:ehl:lserod:119177

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