Hostname: page-component-78c5997874-lj6df Total loading time: 0 Render date: 2024-11-15T06:23:38.833Z Has data issue: false hasContentIssue false
  • English
  • Français

How Large are the Benefits from Using Options?

Published online by Cambridge University Press:  06 April 2009

Anthony Neuberger  and
Stewart Hodges
Anthony Neuberger
Affiliation:
aneuberger@london.edu, Institute of Finance and Accounting, London Business School, Regents Park, London NW1 4SA, U.K.
Stewart Hodges
Affiliation:
stewart.hodges@mail.wbs.warwick.ac.uk, Financial Options Research Centre, Warwick Business School, University of Warwick, Coventry CV4 7AL, U.K.
Get access Rights & Permissions [Opens in a new window]

Abstract

The paper explores the economic value of being able to span market outcomes through the use of options. We model an economy with a single risky asset. Consumption takes place at one date, corresponding to the horizon of all investors. Options on the consumption good are not redundant securities in the economy because volatility is uncertain. The model enables us to examine the benefits to investors of using options to optimize their investments. Within this model, the gains from the use of options appear to be relatively minor.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 37 , Issue 2 , June 2002 , pp. 201 - 220
Copyright
Copyright © School of Business Administration, University of Washington 2002

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

Barles, G.; Romano, M.; and Touzi, N.. “Contingent Claims and Market Completeness in a Stochastic Volatility Model.” Working Paper, CREST (1993).Google Scholar
Bick, A. “On the Consistency of the Black-Scholes Model with a General Equilibrium Framework.” Journal of Financial and Quantitative Analysis, 33 (1987), 259–275.CrossRefGoogle Scholar
Bick, A.. “On Viable Diffusion Price Processes of the Market Portfolio.” Journal of Finance, 45 (1990), 673–690.CrossRefGoogle Scholar
Duffie, D.Dynamic Asset Pricing Theory. Princeton, NJ: Princeton Univ. Press (1996).Google Scholar
Dybvig, P. H. “Inefficient Dynamic Portfolio Strategies, or How to Throw Away a Million Dollars in the Stock Market.” Review of Financial Studies, 1 (1988a), 67–88.CrossRefGoogle Scholar
Dybvig, P. H.. “Distributional Analysis of Portfolio Choice.” Journal of Business, 61 (1988b), 369–393.CrossRefGoogle Scholar
Fleming, W. H., and Soner, H. M.. Controlled Markov Processes and Viscosity Solutions. Berlin: Springer-Verlag (1993).Google Scholar
Grossman, S. J. “An Analysis of the Implications for Stock and Futures Price Volatility of Program Trading and Dynamic Hedging Strategies.” Journal of Business, 61 (1998), 275–298.CrossRefGoogle Scholar
Hart, O. D. “On the Existence of Equilibrium in a Securities Model.” Journal of Economic Theory, 9 (1974), 293–311.CrossRefGoogle Scholar
Hart, O. D. “On the Optimality of Equilibrium when the Market Structure is Incomplete.” Journal of Economic Theory, 11 (1975), 418–443.CrossRefGoogle Scholar
He, H. “Option Prices with Stochastic Volatilities: An Equilibrium Analysis.” Working Paper, Univ. of California, Berkeley, Program in Finance (1992).Google Scholar
Hull, J., and White, A.. “An Analysis of the Bias in Option Pricing Caused by Stochastic Volatility.” Advances in Futures and Options Research, 3 (1988), 29–61.Google Scholar
Leland, H. E. “Who Should Buy Portfolio Insurance?” Journal of Finance, 35 (1980), 581–594.CrossRefGoogle Scholar
Pham, H., and Touzi, N.. “Equilibrium State Prices in a Stochastic Volatility Model.” Working Paper, CREST (1994).Google Scholar
Ross, S. A. “Options and Efficiency.” Quarterly Journal of Economics, 90 (1976), 75–89.CrossRefGoogle Scholar
Scott, L. O. “Option Pricing when the Variance Changes Randomly: Theory, Estimation and an Application.” Journal of Financial and Quantitative Analysis, 17 (1987), 391–409.Google Scholar