[go: up one dir, main page]
IDEAS home Printed from https://ideas.repec.org/p/pra/mprapa/2162.html
   My bibliography  Save this paper

On CAPM and Black-Scholes, differing risk-return strategies

Author

Listed:
  • McCauley, Joseph L.
  • Gunaratne, Gemunu H.
Abstract
In their path-finding 1973 paper Black and Scholes presented two separate derivations of their famous option pricing partial differential equation (pde). The second derivation was from the standpoint that was Black’s original motivation, namely, the capital asset pricing model (CAPM). We show here, in contrast, that the option valuation is not uniquely determined; in particular, strategies based on the delta-hedge and CAPM provide different valuations of an option although both hedges are instantaneouly riskfree. Second, we show explicitly that CAPM is not, as economists claim, an equilibrium theory.

Suggested Citation

  • McCauley, Joseph L. & Gunaratne, Gemunu H., 2003. "On CAPM and Black-Scholes, differing risk-return strategies," MPRA Paper 2162, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:2162
    as

    Download full text from publisher

    File URL: https://mpra.ub.uni-muenchen.de/2162/1/MPRA_paper_2162.pdf
    File Function: original version
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. B. Rosenow & V. Plerou & P. Gopikrishnan & H. E. Stanley, 2001. "Portfolio Optimization and the Random Magnet Problem," Papers cond-mat/0111537, arXiv.org.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Chargoy-Corona, Jesús & Ibarra-Valdez, Carlos, 2006. "A note on Black–Scholes implied volatility," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 370(2), pages 681-688.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. McCauley, Joseph L. & Gunaratne, Gemunu H., 2003. "On CAPM and Black–Scholes differing risk-return strategies," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 329(1), pages 170-177.
    2. A. Schianchi & L. Bongini & M. D. Esposti & C. Giardinà, 2003. "Multiple Optimal Solutions in the Portfolio Selection Model with Short-Selling," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 6(07), pages 703-720.

    More about this item

    Keywords

    Capital asset pricing model (CAPM); nonequilibrium; financial markets; Black-Scholes; option pricing strategies;
    All these keywords.

    JEL classification:

    • C0 - Mathematical and Quantitative Methods - - General
    • D53 - Microeconomics - - General Equilibrium and Disequilibrium - - - Financial Markets
    • C65 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Miscellaneous Mathematical Tools

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:pra:mprapa:2162. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Joachim Winter (email available below). General contact details of provider: https://edirc.repec.org/data/vfmunde.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.