Advanced Search
MyIDEAS: Login

Deterministic versus stochastic volatility: implications for option pricing models

Contents:

Author Info

  • Paul Brockman
  • Mustafa Chowdhury
Registered author(s):

    Abstract

    The Black-Scholes (1973) option pricing model (BSOPM) rests on the assumption that the variance of stock returns is deterministic. However, if stock return volatility is a stochastic process, then the present form of commonly used option pricing models is misspecified and arbitrage-based arguments are invalid. The purpose of this paper is to investigate whether implied stock return volatility is deterministic (with non-linear dependencies) or stochastic. Correlation dimensions are computed using the method of Grassberger and Procaccia (1983) and simple bootstrapping techniques are applied in order to distinguish stochastic from deterministic systems. Results reported herein add support to the growing literature on preference-based stochastic volatility models and generally reject the notion of deterministic volatility.

    Download Info

    If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
    File URL: http://www.tandfonline.com/doi/abs/10.1080/096031097333367
    Download Restriction: Access to full text is restricted to subscribers.

    As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.

    Bibliographic Info

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

    Volume (Year): 7 (1997)
    Issue (Month): 5 ()
    Pages: 499-505

    as in new window
    Handle: RePEc:taf:apfiec:v:7:y:1997:i:5:p:499-505

    Contact details of provider:
    Web page: http://www.tandfonline.com/RAFE20

    Order Information:
    Web: http://www.tandfonline.com/pricing/journal/RAFE20

    Related research

    Keywords:

    References

    No references listed on IDEAS
    You can help add them by filling out this form.

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as in new window

    Cited by:
    1. Catherine Kyrtsou & Costas Vorlow, 2008. "Modelling non-linear comovements between time series," Working Papers 2008_01, Durham University Business School.

    Lists

    This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

    Statistics

    Access and download statistics

    Corrections

    When requesting a correction, please mention this item's handle: RePEc:taf:apfiec:v:7:y:1997:i:5:p:499-505. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Michael McNulty).

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If references are entirely missing, you can add them using this form.

    If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.