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ARBITRAGE-FREE OPTION PRICING MODELS

Part of: Mathematical economics

Published online by Cambridge University Press:  09 October 2009

DENIS BELL  and
SCOTT STELLJES
DENIS BELL*
Affiliation:
Department of Mathematics and Statistics, University of North Florida, 1 UNF Drive, Jacksonville, FL 32224, USA (email: DBell@unf.edu)
SCOTT STELLJES
Affiliation:
Department of Mathematics and Statistics, University of North Florida, 1 UNF Drive, Jacksonville, FL 32224, USA
*
✉For correspondence; e-mail: ahmet@math.missouri.edu
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Abstract

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We describe a scheme for constructing explicitly solvable arbitrage-free models for stock price. This is used to study a model similar to one introduced by Cox and Ross, where the volatility of the stock is proportional to the square root of the stock price. We derive a formula for the value of a European call option based on this model and give a procedure for estimating parameters and for testing the validity of the model.

Keywords

arbitage-freeBlack–Scholes formulaEuropean call option

MSC classification

Secondary: 91B25: Asset pricing models
Type
Research Article
Information
Journal of the Australian Mathematical Society , Volume 87 , Issue 2 , October 2009 , pp. 145 - 152
Copyright
Copyright © Australian Mathematical Publishing Association Inc. 2009

Footnotes

Research partially supported by NSF grant DMS-0451194.

References

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