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Option Pricing and Asset Valuation

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  • R. Cesari

Abstract

In this paper we propose a simple, intuitive approach to asset valuation in terms of marginal contributions to the characteristics (moments) of the market portfolio. Considering only the first two moments, mean and variance, the valuation equation is shown to correspond to Sharpe’s CAPM. A risk-neutral pricing formula is easily derived, showing the equivalence between CAPM and the Black and Scholes’ model. Extensions to higher moments like skewness and kurtosis are straightforward, providing a generalized valuation equation. Finally, the generalized equation is derived in a different, more rigorous way, as a result of a classical intertemporal general equilibrium model.

Suggested Citation

  • R. Cesari, 2003. "Option Pricing and Asset Valuation," Working Papers 467, Dipartimento Scienze Economiche, Universita' di Bologna.
  • Handle: RePEc:bol:bodewp:467
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    File URL: https://amsacta.unibo.it/4827/1/467.pdf
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    References listed on IDEAS

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    1. Robert F. Dittmar, 2002. "Nonlinear Pricing Kernels, Kurtosis Preference, and Evidence from the Cross Section of Equity Returns," Journal of Finance, American Finance Association, vol. 57(1), pages 369-403, February.
    2. 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 637-654, May-June.
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    Cited by:

    1. Stefan Lutz, 2011. "Simultaneous determination of market value and risk premium in the valuation of firms," The School of Economics Discussion Paper Series 1120, Economics, The University of Manchester.

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