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Option pricing: back to the thinking of Bachelier

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  • Cokki Versluis
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    Abstract

    This study compares modifications of Bachelier's expected-value theory with the Black and Scholes model using implicit parameters from actual option market prices or option premiums. For the purpose of this study, seven Dutch option series were analysed over a period of five months in 2004. In all cases the expected-value based models show a better fit with the actual market data than Black and Scholes model. The biggest deviations between model-predicted and actual market prices are about 8%; they occur in the Black and Scholes model at low option premiums.

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    Bibliographic Info

    Article provided by Taylor and Francis Journals in its journal Applied Financial Economics Letters.

    Volume (Year): 2 (2006)
    Issue (Month): 3 (May)
    Pages: 205-209

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    Handle: RePEc:taf:apfelt:v:2:y:2006:i:3:p:205-209

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    1. Christensen, B. J. & Prabhala, N. R., 1998. "The relation between implied and realized volatility," Journal of Financial Economics, Elsevier, vol. 50(2), pages 125-150, November.
    2. Bates, David S., 2003. "Empirical option pricing: a retrospection," Journal of Econometrics, Elsevier, vol. 116(1-2), pages 387-404.
    3. 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.
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