Two stock options at the races: Black–Scholes forecasts

DOI10.1080/14697688.2011.591423zbMATH Open1279.91164arXiv1005.1760OpenAlexW4301023322MaRDI QIDQ2873553FDOQ2873553

Authors: Gleb Oshanin, Grégory Schehr 

Publication date: 24 January 2014

Published in: Quantitative Finance (Search for Journal in Brave)

Abstract: Suppose one buys two very similar stocks and is curious about how much, after some time T, one of them will contribute to the overall asset, expecting, of course, that it should be around 1/2 of the sum. Here we examine this question within the classical Black and Scholes (BS) model, focusing on the evolution of the probability density function P(w) of a random variable w = a_T^{(1)}/(a_T^{(1)} + a_T^{(2)}) where a_T^{(1)} and a_T^{(2)} are the values of two (either European- or the Asian-style) options produced by two absolutely identical BS stochastic equations. We show that within the realm of the BS model the behavior of P(w) is surprisingly different from common-sense-based expectations. For the European-style options P(w) always undergoes a transition, (when T approaches a certain threshold value), from a unimodal to a bimodal form with the most probable values being close to 0 and 1, and, strikingly, w =1/2 being the least probable value. This signifies that the symmetry between two options spontaneously breaks and just one of them completely dominates the sum. For path-dependent Asian-style options we observe the same anomalous behavior, but only for a certain range of parameters. Outside of this range, P(w) is always a bell-shaped function with a maximum at w = 1/2.

Full work available at URL: https://arxiv.org/abs/1005.1760

Mathematics Subject Classification ID

Derivative securities (option pricing, hedging, etc.) (91G20)

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Cited In (4)

• Covariance of the running range of a Brownian trajectory
• Time averaging, ageing and delay analysis of financial time series
• On the physical interpretation of statistical data from black-box systems
• Exact first-passage time distributions for three random diffusivity models

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