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Option Pricing With V. G. Martingale Components

Author

Listed:
  • Frank Milne

    () (Queen's University)

  • Dilip Madan

    (University of Maryland)

Abstract

European call options are priced when the uncertainty driving the stock price follows the V. G. stochastic process (Madan and Seneta 1990). The incomplete markets equilibrium change of measure is approximated and identified using the log return mean, variance, and kurtosis. An exact equilibrium interpretation is also provided, allowing inference about relative risk aversion coefficients from option prices. Relative to Black-Scholes, V. G. option values are higher, particularly so for out of the money options with long maturity on stocks with high means. low variances, and high kurtosis.

Suggested Citation

  • Frank Milne & Dilip Madan, 1991. "Option Pricing With V. G. Martingale Components," Working Papers 1159, Queen's University, Department of Economics.
  • Handle: RePEc:qed:wpaper:1159
    as

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    File URL: http://qed.econ.queensu.ca/working_papers/papers/qed_wp_1159.pdf
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    Option; pricing; Variance Gamma; martingale;

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing

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