Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/67879
Authors: 
Milne, Frank
Madan, Dilip
Year of Publication: 
2008
Series/Report no.: 
Queen's Economics Department Working Paper 1159
Abstract: 
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.
Subjects: 
option pricing
martingales
V. G. process
Document Type: 
Working Paper

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