The effect of non-ideal market conditions on option pricing

DOI10.1016/S0378-4371(02)00627-1zbMATH Open0995.91019arXivcond-mat/0112033MaRDI QIDQ1598567FDOQ1598567

Authors: Josep Perelló, J. Masoliver 

Publication date: 23 May 2002

Published in: Physica A (Search for Journal in Brave)

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.

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

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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)

Cites Work

• The pricing of options and corporate liabilities
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• Martingales and stochastic integrals in the theory of continuous trading
• Stochastic Volatility With an Ornstein–Uhlenbeck Process: An Extension
• Brownian motion in the stock market
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• FINANCIAL MODELING AND OPTION THEORY WITH THE TRUNCATED LEVY PROCESS

Cited In (3)

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

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