Heterogeneous information arrival and option pricing
AbstractWe model the arrival of heterogeneous information in a financial market as a doubly-stochastic Poisson process (DSPP). A DSPP is a member of the family of Poisson processes in which the mean value of the process itself is governed by a stochastic mechanism. We explore the implications for pricing stock, index and foreign currency options of the assumption that the under- lying security evolves as a mixed diffusion DSPP. We derive an intertemporal CAPM and demonstrate that accounting for heterogeneous information arrival may minimize the ubiquitous pricing bias 'smile-effect' of standard option pricing models. We propose a conceptually simple but numerically intensive maximum likelihood estimator of the parameters of a DSPP. A simulation study verifies the adequacy of the asymptotic approximations in finite samples.
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Bibliographic InfoArticle provided by Elsevier in its journal Journal of Econometrics.
Volume (Year): 83 (1998)
Issue (Month): 1-2 ()
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Web page: http://www.elsevier.com/locate/jeconom
Other versions of this item:
- Patrick K. Asea & Mthuli Ncube, 1997. "Heterogeneous Information Arrival and Option Pricing," NBER Working Papers 5950, National Bureau of Economic Research, Inc.
- G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
- D52 - Microeconomics - - General Equilibrium and Disequilibrium - - - Incomplete Markets
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