Option pricing in the presence of extreme fluctuations
We discuss recent evidence that B. Mandelbrot's proposal to model market fluctuations as a Lévy stable process is adequate for short enough time scales, crossing over to a Brownian walk for larger time scales. We show how the reasoning of Black and Scholes should be extended to price and hedge options in the presence of these `extreme' fluctuations. A comparison between theoretical and experimental option prices is also given.
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|Date of creation:||Jan 1997|
|Date of revision:|
|Publication status:||Published in `Mathematics of derivative securities', M. Dempster and S. Pliska Edts, Cambridge University Press, Cambridge UK (1997)|
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