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Factor Models for Option Pricing

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Author Info

  • Peter Carr

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  • Dilip Madan

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    Abstract

    Options on stocks are priced using information on index options and viewing stocks in a factor model as indirectly holding index risk. The method is particularly suited to developing quotations on stock options when these markets are relatively illiquid and one has a liquid index options market to judge the index risk. The pricing strategy is illustrated on IBM and Sony options viewed as holding SPX and Nikkei risk respectively. Copyright Springer Science+Business Media, LLC. 2012

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    File URL: http://hdl.handle.net/10.1007/s10690-011-9151-7
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    Bibliographic Info

    Article provided by Springer in its journal Asia-Pacific Financial Markets.

    Volume (Year): 19 (2012)
    Issue (Month): 4 (November)
    Pages: 319-329

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    Handle: RePEc:kap:apfinm:v:19:y:2012:i:4:p:319-329

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    Web page: http://springerlink.metapress.com/link.asp?id=102851

    Related research

    Keywords: Variance gamma; Characteristic functions; Index options;

    References

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    Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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    1. Charles Quanwei Cao & Gurdip S. Bakshi & Zhiwu Chen, 1997. "Empirical Performance of Alternative Option Pricing Models," Yale School of Management Working Papers ysm65, Yale School of Management.
    2. Eberlein, Ernst & Keller, Ulrich & Prause, Karsten, 1998. "New Insights into Smile, Mispricing, and Value at Risk: The Hyperbolic Model," The Journal of Business, University of Chicago Press, vol. 71(3), pages 371-405, July.
    3. Harrison, J. Michael & Kreps, David M., 1979. "Martingales and arbitrage in multiperiod securities markets," Journal of Economic Theory, Elsevier, vol. 20(3), pages 381-408, June.
    4. Ross, Stephen A., 1976. "The arbitrage theory of capital asset pricing," Journal of Economic Theory, Elsevier, vol. 13(3), pages 341-360, December.
    5. Bakshi, Gurdip & Cao, Charles & Chen, Zhiwu, 1997. " Empirical Performance of Alternative Option Pricing Models," Journal of Finance, American Finance Association, vol. 52(5), pages 2003-49, December.
    6. Bates, David S, 1996. "Jumps and Stochastic Volatility: Exchange Rate Processes Implicit in Deutsche Mark Options," Review of Financial Studies, Society for Financial Studies, vol. 9(1), pages 69-107.
    7. William F. Sharpe, 1964. "Capital Asset Prices: A Theory Of Market Equilibrium Under Conditions Of Risk," Journal of Finance, American Finance Association, vol. 19(3), pages 425-442, 09.
    8. 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.
    9. Charles Quanwei Cao & Gurdip S. Bakshi & Zhiwu Chen, 1997. "Empirical Performance of Alternative Option Pricing Models," Yale School of Management Working Papers ysm54, Yale School of Management.
    10. Robert C. Merton, 1973. "Theory of Rational Option Pricing," Bell Journal of Economics, The RAND Corporation, vol. 4(1), pages 141-183, Spring.
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    Cited by:
    1. Peter Christoffersen & Mathieu Fournier & Kris Jacobs, 2013. "The Factor Structure in Equity Options," CREATES Research Papers 2013-47, School of Economics and Management, University of Aarhus.

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