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Option Pricing with a Dividend General Equilibrium Model

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  • Kyriakos Chourdakis

    (Queen Mary, University of London)

  • Elias Tzavalis

    (Queen Mary, University of London)

Abstract

This 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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File URL: http://www.econ.qmul.ac.uk/papers/doc/wp425.pdf
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Bibliographic Info

Paper provided by Queen Mary, University of London, School of Economics and Finance in its series Working Papers with number 425.

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Date of creation: Nov 2000
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Handle: RePEc:qmw:qmwecw:wp425

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Keywords: Markov regime switching; Option pricing; Risk aversion; Volatility smile;

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