Pricing Options on Assets with Predictable White Noise Returns
AbstractWe study the effect of the predictability of an assets return on the prices of options on that asset, for models in which returns are serially uncorrelated, yet predictable on the basis of a larger information set. We show that return predictability may matter in a discrete time world, especially for longer maturity options. However, discrepancies between the frequency of trading and observation become relevant in estimating the model parameters. When trading is continuous, Black-Scholes is valid, and the sample variance of holding returns over finite periods is an appropriate estimator of the variance of instantaneous returns.
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Bibliographic InfoPaper provided by Financial Markets Group in its series FMG Discussion Papers with number dp267.
Date of creation: Aug 1997
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- Mencía, Javier & Sentana, Enrique, 2013.
"Valuation of VIX derivatives,"
Journal of Financial Economics,
Elsevier, vol. 108(2), pages 367-391.
- Javier Mencía & Enrique Sentana, 2012. "Valuation of vix derivatives," Banco de Espaï¿½a Working Papers 1232, Banco de Espa�a.
- Javier Mencía & Enrique Sentana, 2009. "Valuation Of Vix Derivatives," Working Papers wp2009_0913, CEMFI.
- Mencía, Javier & Sentana, Enrique, 2010. "Valuation of VIX Derivatives," CEPR Discussion Papers 7619, C.E.P.R. Discussion Papers.
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