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Option pricing with a non-zero lower bound on stock price

✍ Scribed by Ming Dong

Publisher
John Wiley and Sons
Year
2005
Tongue
English
Weight
161 KB
Volume
25
Category
Article
ISSN
0270-7314

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✦ Synopsis

Abstract

Black, F. and Scholes, M. (1973) assume a geometric Brownian motion for stock prices and therefore a normal distribution for stock returns. In this article a simple alternative model to Black and Scholes (1973) is presented by assuming a non‐zero lower bound on stock prices. The proposed stock price dynamics simultaneously accommodate skewness and excess kurtosis in stock returns. The feasibility of the proposed model is assessed by simulation and maximum likelihood estimation of the return probability density. The proposed model is easily applicable to existing option pricing models and may provide improved precision in option pricing. Β© 2005 Wiley Periodicals, Inc. Jrl Fut Mark 25:775–794, 2005

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