When are Options Overpriced? : the Black-Scholes Model and Alternative Characterisation of the Pricing Kernel

Franke, Günter; Stapleton, Richard C.; Subrahmanyam, Marti G.

When are Options Overpriced? : the Black-Scholes Model and Alternative Characterisation of the Pricing Kernel

Dateien

314_1.pdfGröße: 260.96 KBDownloads: 494

Datum

1999

Autor:innen

Franke, Günter

Stapleton, Richard C.

Subrahmanyam, Marti G.

Open Access-Veröffentlichung

Open Access Green

Sammlungen

Wirtschaftswissenschaften

Publikationstyp

Working Paper/Technical Report

Publikationsstatus

Published

Zusammenfassung

An important determinant of option prices is the elasticity of the pricing kernel used to price all claims in the economy. In this paper, we first show that for a given forward price of the underlying asset, option prices are higher when the elasticity of the pricing kernel is declining than when it is constant. We then investigate the implications of the elasticity of the pricing kernel for the stochastic process followed by the underlying asset. Given that the underlying information process follows a geometric Brownian motion, we demonstrate that constant elasticity of the pricing kernel is equivalent toaBrownian motion for the forward price of the underlying asset, so that the Black-Scholes formula correctly prices options on the asset. In contrast, declining elasticity implies that the forward price process is no longer a Brownian motion: it has higher volatility and exhibits autocorrelation. In this case, the Black-Scholes formula underprices all options.

Fachgebiet (DDC)

330 Wirtschaft

Zitieren

ISO 690

FRANKE, Günter, Richard C. STAPLETON, Marti G. SUBRAHMANYAM, 1999. When are Options Overpriced? : the Black-Scholes Model and Alternative Characterisation of the Pricing Kernel

BibTex

@techreport{Franke1999Optio-12256,
  year={1999},
  series={CoFE-Diskussionspapiere / Zentrum für Finanzen und Ökonometrie},
  title={When are Options Overpriced? : the Black-Scholes Model and Alternative Characterisation of the Pricing Kernel},
  number={1999/01},
  author={Franke, Günter and Stapleton, Richard C. and Subrahmanyam, Marti G.}
}

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