Option Pricing With V. G. Martingale Components

Dilip B. Madan and Frank Milne
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Dilip B. Madan: University of Maryland

No 1159, Working Paper from Economics Department, Queen's University

Abstract: 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 measureis 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 fromoption 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.

Keywords: Option; pricing; Variance Gamma; martingale (search for similar items in EconPapers)
JEL-codes: G12 G13 (search for similar items in EconPapers)
Pages: 17 pages
Date: 1991-10
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Citations: View citations in EconPapers (90)

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Persistent link: https://EconPapers.repec.org/RePEc:qed:wpaper:1159

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