Option Pricing with a Dividend General Equilibrium Model
AbstractThis paper derives a general equilibrium option pricing model for a European call assuming that the economy is exogenously driven by a dividend process following Hamilton's (1989) Markov regime switching model. The derived formula is used to investigate if the European call option prices are consistently priced with the stock market prices. This is done by obtaining the implied risk aversion coefficient of the model, for constant relative risk aversion preferences, based on traded option prices data.
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Bibliographic InfoPaper provided by Queen Mary, University of London, School of Economics and Finance in its series Working Papers with number 425.
Date of creation: Nov 2000
Date of revision:
Markov regime switching; Option pricing; Risk aversion; Volatility smile;
Find related papers by JEL classification:
- G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
- G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
- C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models &bull Diffusion Processes
- C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection
This paper has been announced in the following NEP Reports:
- NEP-ALL-2001-01-21 (All new papers)
- NEP-FIN-2001-02-21 (Finance)
- NEP-FMK-2000-12-19 (Financial Markets)
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