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DF Structure Models for Options Pricing

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  • DAI
  • Feng QIN
  • Zifu
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Abstract

Based on the Partial Distribution, we presents the concepts and expressions of DF process and DF structure and put forward the DF structure models of pricing options on a non-dividend-paying underlying for the first time. The DF structure models are able to price the call and put options exercised at any time, so it is applicable to pricing the American and European options. Finally, examples are given to compare the options priced by DF formulas and by Black-Scholes formulas, they show, as a whole, that the DF prices of options are closer to the trading prices than Black-Scholes prices in many cases.

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Bibliographic Info

Article provided by IUP Publications in its journal The IUP Journal of Applied Economics.

Volume (Year): IV (2005)
Issue (Month): 6 (November)
Pages: 61-77

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Handle: RePEc:icf:icfjae:v:04:y:2005:i:6:p:61-77

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References

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  1. Geske, Robert & Roll, Richard, 1984. " On Valuing American Call Options with the Black-Scholes European Formula," Journal of Finance, American Finance Association, vol. 39(2), pages 443-55, June.
  2. 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.
  3. Merton, Robert C., 1976. "Option pricing when underlying stock returns are discontinuous," Journal of Financial Economics, Elsevier, vol. 3(1-2), pages 125-144.
  4. Salvatore Micciche` & Giovanni Bonanno & Fabrizio Lillo & Rosario N. Mantegna, 2002. "Volatility in Financial Markets: Stochastic Models and Empirical Results," Papers cond-mat/0202527, arXiv.org.
  5. Barone-Adesi, Giovanni & Whaley, Robert E, 1987. " Efficient Analytic Approximation of American Option Values," Journal of Finance, American Finance Association, vol. 42(2), pages 301-20, June.
  6. Peter Ritchken & Rob Trevor, 1999. "Pricing Options under Generalized GARCH and Stochastic Volatility Processes," Journal of Finance, American Finance Association, vol. 54(1), pages 377-402, 02.
  7. Peter Carr & Robert Jarrow & Ravi Myneni, 1992. "Alternative Characterizations Of American Put Options," Mathematical Finance, Wiley Blackwell, vol. 2(2), pages 87-106.
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Cited by:
  1. Feng, Dai & Yuan-Zheng, Zhong, 2006. "The Stochastic Advance-Retreat Course: An Approach to Analyse Social-Economic Evolution," MPRA Paper 117, University Library of Munich, Germany.
  2. Feng Dai & Yajun Sun & Songtao Wu, 2008. "The Structure Models for Futures Options Pricing and Related Researches," The IUP Journal of Applied Economics, IUP Publications, vol. 0(3), pages 61-76, May.
  3. Feng Dai & Jianping Qi & Saravanan Muthaiyah & Ling Liang, 2011. "Socio-economic development model based on stochastic advance-retreat course: An analysis on US economy in recent 70 years," International Journal of Social Economics, Emerald Group Publishing, vol. 38(5), pages 416-437, April.
  4. Feng Dai & Hui Liu & Ying Wang, 2005. "Multivariate Partial Distribution: A New Method of Pricing Group Assets and Analyzing the Risk for Hedging," EERI Research Paper Series EERI_RP_2005_03, Economics and Econometrics Research Institute (EERI), Brussels.
  5. Feng Dai & Feng Han, 2004. "Optimal Choice Models for Executing Time to American Options," Finance 0412016, EconWPA.
  6. Feng Dai & Lin Liang, 2005. "The Advance in Partial Distribution£ºA New Mathematical Tool for Economic Management," Econometrics 0508001, EconWPA.

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