IDEAS home Printed from https://ideas.repec.org/p/mit/sloanp/2483.html

Implementing option pricing models when asset returns are predictable

Author

Listed:
  • Lo, Andrew W. (Andrew Wen-Chuan)
  • Wang, Jiang, 1959-

Abstract

The predictability of an asset's returns will affect the prices of options on that asset, even though predictability is typically induced by the drift, which does not enter the option pricing formula. For discretely sampled data, predictability is linked to the parameters that do enter the option pricing formula. The authors construct an adjustment for predictability to the Black-Scholes formula and show that this adjustment can be important even for small levels of predictability, especially for longer maturity options. They propose several continuous-time linear diffusion processes that can capture broader forms of predictability and provide numerical examples that illustrate their importance for pricing options. Copyright 1995 by American Finance Association.
(This abstract was borrowed from another version of this item.)

Suggested Citation

  • Lo, Andrew W. (Andrew Wen-Chuan) & Wang, Jiang, 1959-, 1993. "Implementing option pricing models when asset returns are predictable," Working papers 3593-93., Massachusetts Institute of Technology (MIT), Sloan School of Management.
    • Handle: RePEc:mit:sloanp:2483
    as

    Download full text from publisher

    File URL: http://hdl.handle.net/1721.1/2483
    Download Restriction: no
    ---><---

    Other versions of this item:

    More about this item

    Keywords

    ;
    ;

    JEL classification:

    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:mit:sloanp:2483. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no bibliographic references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: None The email address of this maintainer does not seem to be valid anymore. Please ask None to update the entry or send us the correct address (email available below). General contact details of provider: https://edirc.repec.org/data/ssmitus.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.