Options Pricing with Arithmetic Brownian Motion and its Implication for Risk-Neutral Valuation
Additional contact information
Qiang Liu: School of Management, University of Electronic Science & Technology of China
Finance from EconWPA
Risk-neutral valuation is used widely in derivatives pricing. It is shown in this paper, however, that the naïve approach of simply setting the growth rate of the underlying security to risk-free interest rate, which happens to work for a geometric Brownian motion (GBM) process, fails to work when the underlying price follows the arithmetic Brownian motion (ABM). Therefore, the formal approach using a martingale measure should be used instead when the underlying process is not a GBM.
Keywords: risk-neutral valuation; arithmetic Brownian motion; options price formula (search for similar items in EconPapers)
JEL-codes: G (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-fmk and nep-sea
Note: Type of Document - pdf; pages: 5
References: Add references at CitEc
Citations Track citations by RSS feed
Downloads: (external link)
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
Persistent link: https://EconPapers.repec.org/RePEc:wpa:wuwpfi:0512001
Access Statistics for this paper
More papers in Finance from EconWPA
Bibliographic data for series maintained by EconWPA ().