IDEAS home Printed from https://ideas.repec.org/p/pra/mprapa/57978.html
   My bibliography  Save this paper

Option Pricing in an Oligopolistic Setting

Author

Listed:
  • Villena, Marcelo
  • Villena, Mauricio

Abstract

Option valuation models are usually based on frictionless markets. This paper extends and complements the literature by developing a model of option pricing in which the derivative and/or the underlying asset have an oligopolistic market structure, which produces an expected return on these assets that exceeds (or goes below) their fundamental value, and hence affects the option valuation. Our formulation begins modeling a capital asset pricing model that takes into account an oligopolistic setting, and hence the standard option pricing formula is derived, but this time considering the level of market power into the model. Our results show that higher levels of market power will lower the required expected return, in comparison to the perfectly competitive CAPM model. Similarly, simulations show that higher levels of market power in the derivative markets tend to increase the call option values in comparison to those values given by the standard Black and Scholes formulation, while the impact of market power in the underlying asset market tends to lower the option price.

Suggested Citation

  • Villena, Marcelo & Villena, Mauricio, 2011. "Option Pricing in an Oligopolistic Setting," MPRA Paper 57978, University Library of Munich, Germany, revised 16 Aug 2014.
  • Handle: RePEc:pra:mprapa:57978
    as

    Download full text from publisher

    File URL: https://mpra.ub.uni-muenchen.de/57978/1/MPRA_paper_57978.pdf
    File Function: original version
    Download Restriction: no

    References listed on IDEAS

    as
    1. Acharya, Viral V. & Pedersen, Lasse Heje, 2005. "Asset pricing with liquidity risk," Journal of Financial Economics, Elsevier, vol. 77(2), pages 375-410, August.
    2. John Lintner, 1965. "Security Prices, Risk, And Maximal Gains From Diversification," Journal of Finance, American Finance Association, vol. 20(4), pages 587-615, December.
    3. Fama, Eugene F. & French, Kenneth R., 1993. "Common risk factors in the returns on stocks and bonds," Journal of Financial Economics, Elsevier, vol. 33(1), pages 3-56, February.
    4. 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.
    5. Robert C. Merton, 2005. "Theory of rational option pricing," World Scientific Book Chapters,in: Theory Of Valuation, chapter 8, pages 229-288 World Scientific Publishing Co. Pte. Ltd..
    6. 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.
    7. Figlewski, Stephen, 1989. " Options Arbitrage in Imperfect Markets," Journal of Finance, American Finance Association, vol. 44(5), pages 1289-1311, December.
    8. Fama, Eugene F. & French, Kenneth R., 2012. "Size, value, and momentum in international stock returns," Journal of Financial Economics, Elsevier, vol. 105(3), pages 457-472.
    9. Husmann, Sven & Todorova, Neda, 2011. "CAPM option pricing," Finance Research Letters, Elsevier, vol. 8(4), pages 213-219.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    Capital Asset Pricing; Option Pricing; Oligopolistic Markets.;

    JEL classification:

    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing

    NEP fields

    This paper has been announced in the following NEP Reports:

    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:pra:mprapa:57978. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Joachim Winter) or (Rebekah McClure). General contact details of provider: http://edirc.repec.org/data/vfmunde.html .

    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.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with 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.

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

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.