Please use this identifier to cite or link to this item:
Milne, Frank
Madan, Dilip
Year of Publication: 
Series/Report no.: 
Queen's Economics Department Working Paper 1159
European call options are priced when the uncertainty driving the stock price follows the V. G. stochastic process (Madan and Seneta 1990). The incomplete markets equilibrium change of measure is approximated and identified using the log return mean. variance, and kurtosis. An exact equilibrium interpretation is also provided, allowing inference about relative risk aversion coefficients from option prices. Relative to Black-Scholes, V. G. option values are higher, particularly so for out of the money options with long maturity on stocks with high means, low variances, and high kurtosis.
option pricing
V. G. process
Document Type: 
Working Paper

Files in This Item:
812.61 kB

Items in EconStor are protected by copyright, with all rights reserved, unless otherwise indicated.