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Negative volatility and the Survival of Western Financial Markets

Author

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  • Aase, Knut K.

    (Dept. of Finance and Management Science, Norwegian School of Economics and Business Administration)

Abstract

The paper discusses situations where certain parameters are given values that are outside their natural ranges. One case is obtained when plugging in a negative value for the volatility parameter in the Black and Scholes formula. This leads to seemingly "new" results. A different setting is considered related to the developments in time of biological populations. Here deterministic models lead to chaotically fluctuating population sizes, which came as a surprise to workers with population data. It is argued that the origins for the seemingly new and original results may be related.

Suggested Citation

  • Aase, Knut K., 2004. "Negative volatility and the Survival of Western Financial Markets," Discussion Papers 2004/5, Norwegian School of Economics, Department of Business and Management Science.
    • Handle: RePEc:hhs:nhhfms:2004_005
    as

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    File URL: http://hdl.handle.net/11250/163578
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    References listed on IDEAS

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    1. Robert C. Merton, 2005. "Theory of rational option pricing," World Scientific Book Chapters, in: Sudipto Bhattacharya & George M Constantinides (ed.), Theory Of Valuation, chapter 8, pages 229-288, World Scientific Publishing Co. Pte. Ltd..
    2. 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, September.
    3. 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.
    4. Knut K. Aase, 2002. "Equilibrium Pricing in the Presence of Cumulative Dividends Following a Diffusion," Mathematical Finance, Wiley Blackwell, vol. 12(3), pages 173-198, July.
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    Cited by:

    1. Mjøs, Aksel & Persson, Svein-Arne, 2010. "A simple model of deferred callability in defaultable debt," European Journal of Operational Research, Elsevier, vol. 207(3), pages 1350-1357, December.

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    More about this item

    Keywords

    The Black and Scholes Model; negative volatility; population models; chaotic fluctuations; bifurcation;
    All these keywords.

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)

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