dorsal/arxiv
View SchemaMartingale Option Pricing
| Authors | J. L. McCauley, G. H. Gunaratne, K. E. Bassler |
|---|---|
| Categories | |
| ArXiv ID | physics/0606011 |
| URL | https://arxiv.org/abs/physics/0606011 |
| DOI | 10.1016/j.physa.2007.02.038 |
Abstract
We show that our generalization of the Black-Scholes partial differential equation (pde) for nontrivial diffusion coefficients is equivalent to a Martingale in the risk neutral discounted stock price. Previously, this was proven for the case of the Gaussian logarithmic returns model by Harrison and Kreps, but we prove it for much a much larger class of returns models where the diffusion coefficient depends on both returns x and time t. That option prices blow up if fat tails in logarithmic returns x are included in the market dynamics is also explained.
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"abstract": "We show that our generalization of the Black-Scholes partial differential\nequation (pde) for nontrivial diffusion coefficients is equivalent to a\nMartingale in the risk neutral discounted stock price. Previously, this was\nproven for the case of the Gaussian logarithmic returns model by Harrison and\nKreps, but we prove it for much a much larger class of returns models where the\ndiffusion coefficient depends on both returns x and time t. That option prices\nblow up if fat tails in logarithmic returns x are included in the market\ndynamics is also explained.",
"arxiv_id": "physics/0606011",
"authors": [
"J. L. McCauley",
"G. H. Gunaratne",
"K. E. Bassler"
],
"categories": [
"physics.soc-ph",
"q-fin.PR"
],
"doi": "10.1016/j.physa.2007.02.038",
"title": "Martingale Option Pricing",
"url": "https://arxiv.org/abs/physics/0606011"
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