The effect of non-ideal market conditions on option pricing

DOI10.1016/S0378-4371(02)00627-1MaRDI QIDQ1598567zbMATH OpenFDO

Authors Josep Perelló, J. Masoliver

Publication date 23 May 2002

Published in Physica A (Search for Journal in Brave)

Full work available at URL https://arxiv.org/abs/cond-mat/0112033

zbMATH Keywords

heavy tailscolored noisegeometric Brownian motion

Mathematics Subject Classification ID

Derivative securities (option pricing, hedging, etc.) (91G20) Applications of statistical and quantum mechanics to economics (econophysics) (91B80) Stochastic models in economics (91B70)

Abstract: Option pricing is mainly based on ideal market conditions which are well represented by the Geometric Brownian Motion (GBM) as market model. We study the effect of non-ideal market conditions on the price of the option. We focus our attention on two crucial aspects appearing in real markets: The influence of heavy tails and the effect of colored noise. We will see that both effects have opposite consequences on option pricing.

Recommendations

• AN INVITATION TO MARKET-BASED OPTION PRICING AND ITS APPLICATIONS(<Special Issue>the 50th Anniversary of the Operations Research Society of Japan)
• A new method of option pricing based on Black-Scholes model
• On option pricing in illiquid markets with jumps
• Option pricing under deformed Gaussian distributions
• A study on option pricing with transaction cost when underlying asset pricing is a jump-diffusion process

Cites work

• scientific article; zbMATH DE number 6137478 (Why is no real title available?)
• scientific article; zbMATH DE number 3319139 (Why is no real title available?)
• scientific article; zbMATH DE number 3353828 (Why is no real title available?)
• Brownian motion in the stock market
• FINANCIAL MODELING AND OPTION THEORY WITH THE TRUNCATED LEVY PROCESS
• Martingales and stochastic integrals in the theory of continuous trading
• Stochastic Volatility With an Ornstein–Uhlenbeck Process: An Extension
• The pricing of options and corporate liabilities

Cited in

(3)

• Fat tails and colored noise in financial derivatives
• Option pricing under stochastic volatility: the exponential Ornstein-Uhlenbeck model
• Investigation of non-Gaussian effects in the Brazilian option market

This page was built for publication: The effect of non-ideal market conditions on option pricing

Report a bug (only for logged in users!)Click here to report a bug for this page (MaRDI item Q1598567)