Option pricing in the presence of extreme fluctuations
AbstractWe 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.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by Science & Finance, Capital Fund Management in its series Science & Finance (CFM) working paper archive with number 500038.
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)
Find related papers by JEL classification:
- G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
This paper has been announced in the following NEP Reports:
You can help add them by filling out this form.
CitEc Project, subscribe to its RSS feed for this item.
- repec:sfi:sfiwpa:500044 is not listed on IDEAS
- A. Johansen & D. Sornette, 1997. "Stock market crashes are outliers," Papers, arXiv.org cond-mat/9712005, arXiv.org, revised Dec 1997.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Marc Potters).
If references are entirely missing, you can add them using this form.