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Option Pricing with a Dividend General Equilibrium Model

Author

Listed:
  • Kyriakos Chourdakis

    (Queen Mary, University of London)

  • Elias Tzavalis

    (Queen Mary, University of London)

Abstract

This paper derives a general equilibrium option pricing model for a European call assuming that the economy is exogenously driven by a dividend process following Hamilton's (1989) Markov regime switching model. The derived formula is used to investigate if the European call option prices are consistently priced with the stock market prices. This is done by obtaining the implied risk aversion coefficient of the model, for constant relative risk aversion preferences, based on traded option prices data.

Suggested Citation

  • Kyriakos Chourdakis & Elias Tzavalis, 2000. "Option Pricing with a Dividend General Equilibrium Model," Working Papers 425, Queen Mary University of London, School of Economics and Finance.
  • Handle: RePEc:qmw:qmwecw:wp425
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    File URL: http://www.econ.qmul.ac.uk/media/econ/research/workingpapers/archive/wp425.pdf
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    More about this item

    Keywords

    Markov regime switching; Option pricing; Risk aversion; Volatility smile;

    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
    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection

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