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Factor Models for Option Pricing

  • Peter Carr

    ()

  • Dilip Madan

    ()

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    Options on stocks are priced using information on index options and viewing stocks in a factor model as indirectly holding index risk. The method is particularly suited to developing quotations on stock options when these markets are relatively illiquid and one has a liquid index options market to judge the index risk. The pricing strategy is illustrated on IBM and Sony options viewed as holding SPX and Nikkei risk respectively. Copyright Springer Science+Business Media, LLC. 2012

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    File URL: http://hdl.handle.net/10.1007/s10690-011-9151-7
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    Article provided by Springer in its journal Asia-Pacific Financial Markets.

    Volume (Year): 19 (2012)
    Issue (Month): 4 (November)
    Pages: 319-329

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    Handle: RePEc:kap:apfinm:v:19:y:2012:i:4:p:319-329
    Contact details of provider: Web page: http://springerlink.metapress.com/link.asp?id=102851

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    1. Charles Quanwei Cao & Gurdip S. Bakshi & Zhiwu Chen, 1997. "Empirical Performance of Alternative Option Pricing Models," Yale School of Management Working Papers ysm65, Yale School of Management.
    2. Harrison, J. Michael & Kreps, David M., 1979. "Martingales and arbitrage in multiperiod securities markets," Journal of Economic Theory, Elsevier, vol. 20(3), pages 381-408, June.
    3. William F. Sharpe, 1964. "Capital Asset Prices: A Theory Of Market Equilibrium Under Conditions Of Risk," Journal of Finance, American Finance Association, vol. 19(3), pages 425-442, 09.
    4. Robert C. Merton, 1973. "Theory of Rational Option Pricing," Bell Journal of Economics, The RAND Corporation, vol. 4(1), pages 141-183, Spring.
    5. Black, Fischer & Scholes, Myron S, 1973. "The Pricing of Options and Corporate Liabilities," Journal of Political Economy, University of Chicago Press, vol. 81(3), pages 637-54, May-June.
    6. Bates, David S, 1996. "Jumps and Stochastic Volatility: Exchange Rate Processes Implicit in Deutsche Mark Options," Review of Financial Studies, Society for Financial Studies, vol. 9(1), pages 69-107.
    7. Eberlein, Ernst & Keller, Ulrich & Prause, Karsten, 1998. "New Insights into Smile, Mispricing, and Value at Risk: The Hyperbolic Model," The Journal of Business, University of Chicago Press, vol. 71(3), pages 371-405, July.
    8. Ross, Stephen A., 1976. "The arbitrage theory of capital asset pricing," Journal of Economic Theory, Elsevier, vol. 13(3), pages 341-360, December.
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