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Option pricing with a non‐zero lower bound on stock price

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  • Ming Dong

Abstract

Black, F. and Scholes, M. (1973) assume a geometric Brownian motion for stock prices and therefore a normal distribution for stock returns. In this article a simple alternative model to Black and Scholes (1973) is presented by assuming a non‐zero lower bound on stock prices. The proposed stock price dynamics simultaneously accommodate skewness and excess kurtosis in stock returns. The feasibility of the proposed model is assessed by simulation and maximum likelihood estimation of the return probability density. The proposed model is easily applicable to existing option pricing models and may provide improved precision in option pricing. © 2005 Wiley Periodicals, Inc. Jrl Fut Mark 25:775–794, 2005

Suggested Citation

  • Ming Dong, 2005. "Option pricing with a non‐zero lower bound on stock price," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 25(8), pages 775-794, August.
    • Handle: RePEc:wly:jfutmk:v:25:y:2005:i:8:p:775-794
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