Marc Potters (Science & Finance, Capital Fund Management) Rama Cont (Science & Finance, Capital Fund Management) Jean-Philippe Bouchaud (Science & Finance, Capital Fund Management, CEA Saclay;)
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We show, by studying in detail the market prices of options on liquid markets, that the market has empirically corrected the simple, but inadequate Black-Scholes formula to account for two important statistical features of asset fluctuations: `fat tails' and correlations in the scale of fluctuations. These aspects, although not included in the pricing models, are very precisely reflected in the price fixed by the market as a whole. Financial markets thus behave as rather efficient adaptive systems.
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Length: Date of creation: Sep 1996 Date of revision: Publication status: Published in Europhysics Letters 41, 239 (1998) Handle: RePEc:sfi:sfiwpa:500037
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