Factor Models for Option Pricing

Peter Carr; Dilip B. Madan

doi:10.1007/s10690-011-9151-7

Factor Models for Option Pricing

Peter Carr, Dilip B. Madan

Finance and Risk Engineering

Research output: Contribution to journal › Article › peer-review

Abstract

Options on stocks are priced using information on index options and viewing stocks in a factor model as indirectly holding index risk. The method is particularly suited to developing quotations on stock options when these markets are relatively illiquid and one has a liquid index options market to judge the index risk. The pricing strategy is illustrated on IBM and Sony options viewed as holding SPX and Nikkei risk respectively.

Original language	English (US)
Pages (from-to)	319-329
Number of pages	11
Journal	Asia-Pacific Financial Markets
Volume	19
Issue number	4
DOIs	https://doi.org/10.1007/s10690-011-9151-7
State	Published - Oct 2012

Keywords

Characteristic functions
Index options
Variance gamma

ASJC Scopus subject areas

Finance

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10.1007/s10690-011-9151-7

Cite this

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abstract = "Options on stocks are priced using information on index options and viewing stocks in a factor model as indirectly holding index risk. The method is particularly suited to developing quotations on stock options when these markets are relatively illiquid and one has a liquid index options market to judge the index risk. The pricing strategy is illustrated on IBM and Sony options viewed as holding SPX and Nikkei risk respectively.",

keywords = "Characteristic functions, Index options, Variance gamma",

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Factor Models for Option Pricing

Abstract

Keywords

ASJC Scopus subject areas

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