Option Pricing with a Dividend General Equilibrium Model

Kyriakos Chourdakis and Elias Tzavalis

No 425, Working Papers from Queen Mary University of London, School of Economics and Finance

Abstract: This paper derives a general equilibrium option pricing model for a European call assuming that the economy is exogenously driven by a dividend process following Hamilton's (1989) Markov regime switching model. The derived formula is used to investigate if the European call option prices are consistently priced with the stock market prices. This is done by obtaining the implied risk aversion coefficient of the model, for constant relative risk aversion preferences, based on traded option prices data.

Keywords: Markov regime switching; Option pricing; Risk aversion; Volatility smile (search for similar items in EconPapers)
JEL-codes: C22 C52 G12 G13 (search for similar items in EconPapers)
Date: 2000-11-01
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Persistent link: https://EconPapers.repec.org/RePEc:qmw:qmwecw:425

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