Factor Models for Option Pricing

Peter Carr, Dilip B. Madan

Research output: Contribution to journalArticlepeer-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 languageEnglish (US)
Pages (from-to)319-329
Number of pages11
JournalAsia-Pacific Financial Markets
Volume19
Issue number4
DOIs
StatePublished - Oct 2012

Keywords

  • Characteristic functions
  • Index options
  • Variance gamma

ASJC Scopus subject areas

  • Finance

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