Jean-Philippe Bouchaud (Science & Finance, Capital Fund Management, CEA Saclay;) Didier Sornette (UCLA, Science & Finance, Capital Fund Management) Marc Potters (Science & Finance, Capital Fund Management)
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We discuss recent evidence that B. Mandelbrot's proposal to model market fluctuations as a Lévy stable process is adequate for short enough time scales, crossing over to a Brownian walk for larger time scales. We show how the reasoning of Black and Scholes should be extended to price and hedge options in the presence of these `extreme' fluctuations. A comparison between theoretical and experimental option prices is also given.
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Length: Date of creation: Jan 1997 Date of revision: Publication status: Published in `Mathematics of derivative securities', M. Dempster and S. Pliska Edts, Cambridge University Press, Cambridge UK (1997) Handle: RePEc:sfi:sfiwpa:500038
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