OPTION PRICING WITH V. G. MARTINGALE COMPONENTS

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.


Issue Date:
2008-10
Publication Type:
Working or Discussion Paper
Record Identifier:
https://ageconsearch.umn.edu/record/273635
Language:
English
Total Pages:
18
Series Statement:
Working Paper No. 1159




 Record created 2018-06-13, last modified 2018-06-14

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