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CAPM option pricing

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Author Info

  • Husmann, Sven
  • Todorova, Neda
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    Abstract

    This paper extends the option pricing equations of Black and Scholes [1973. Journal of Political Economy 81, 637–654], Jarrow and Madan [1997. European Finance Review 1, 15–30] and Husmann and Stephan [2007. Journal of Futures Markets 27, 961–979]. In particular, we show that the length of the individual planning horizon is a determinant of an option’s value. The derived pricing equations can be presented in terms of the Black and Scholes [1973. Journal of Political Economy 81, 637–654] option values which ensures an easy application in practice.

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    File URL: http://www.sciencedirect.com/science/article/pii/S1544612311000146
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    Bibliographic Info

    Article provided by Elsevier in its journal Finance Research Letters.

    Volume (Year): 8 (2011)
    Issue (Month): 4 ()
    Pages: 213-219

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    Handle: RePEc:eee:finlet:v:8:y:2011:i:4:p:213-219

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    Web page: http://www.elsevier.com/locate/frl

    Related research

    Keywords: Capital asset pricing model; Option pricing; Planning horizon; Incomplete markets;

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    References

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    1. Black, Fischer & Scholes, Myron S, 1973. "The Pricing of Options and Corporate Liabilities," Journal of Political Economy, University of Chicago Press, vol. 81(3), pages 637-54, May-June.
    2. Rubinstein, Mark, 1984. " A Simple Formula for the Expected Rate of Return of an Option over a Finite Holding Period," Journal of Finance, American Finance Association, vol. 39(5), pages 1503-09, December.
    3. Sven Husmann & Andreas Stephan, 2006. "On Estimating an Asset's Implicit Beta," Discussion Papers of DIW Berlin 640, DIW Berlin, German Institute for Economic Research.
    4. Joel M. Vanden, 2004. "Options Trading and the CAPM," Review of Financial Studies, Society for Financial Studies, vol. 17(1), pages 207-238.
    5. Cox, John C. & Ross, Stephen A., 1976. "The valuation of options for alternative stochastic processes," Journal of Financial Economics, Elsevier, vol. 3(1-2), pages 145-166.
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    Cited by:
    1. Arısoy, Yakup Eser & Altay-Salih, Aslıhan & Pınar, Mustafa Ç, 2014. "Optimal multi-period consumption and investment with short-sale constraints," Finance Research Letters, Elsevier, vol. 11(1), pages 16-24.

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