IDEAS home Printed from https://ideas.repec.org/a/kap/compec/v57y2021i4d10.1007_s10614-020-10024-2.html
   My bibliography  Save this article

An Approximation Scheme for Option Pricing Under Two-State Continuous CAPM

Author

Listed:
  • Ali Safdari-Vaighani

    (Allameh Tabataba’i University)

  • Davood Ahmadian

    (University of Tabriz)

  • Roja Javid-Jahromi

    (Shahed University)

Abstract

Option pricing under continuous-time CAPM has been formulated by partial differential equation, which is an extension of the Black–Scholes PDE. The focus of this paper is to present the radial basis function partition of unity method for evaluation of options in which underlying asset price follows the two-state continuous CAPM. Our experiments illustrate the behavior of the market volatility skew and the effect of the asset’s beta on option price. The numerical examples show that the proposed scheme is accurate and competitive with finite difference method.

Suggested Citation

  • Ali Safdari-Vaighani & Davood Ahmadian & Roja Javid-Jahromi, 2021. "An Approximation Scheme for Option Pricing Under Two-State Continuous CAPM," Computational Economics, Springer;Society for Computational Economics, vol. 57(4), pages 1373-1385, April.
    • Handle: RePEc:kap:compec:v:57:y:2021:i:4:d:10.1007_s10614-020-10024-2
    DOI: 10.1007/s10614-020-10024-2
    as

    Download full text from publisher

    File URL: http://link.springer.com/10.1007/s10614-020-10024-2
    File Function: Abstract
    Download Restriction: Access to the full text of the articles in this series is restricted.
    File URL: https://libkey.io/10.1007/s10614-020-10024-2?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Jean-Pierre Fouque & Eli Kollman, 2011. "Calibration of Stock Betas from Skews of Implied Volatilities," Applied Mathematical Finance, Taylor & Francis Journals, vol. 18(2), pages 119-137.
    2. Jean-Pierre Fouque & Adam Tashman, 2012. "Option pricing under a stressed-beta model," Annals of Finance, Springer, vol. 8(2), pages 183-203, May.
    3. William F. Sharpe, 1964. "Capital Asset Prices: A Theory Of Market Equilibrium Under Conditions Of Risk," Journal of Finance, American Finance Association, vol. 19(3), pages 425-442, September.
    4. Black, Fischer & Scholes, Myron S, 1973. "The Pricing of Options and Corporate Liabilities," Journal of Political Economy, University of Chicago Press, vol. 81(3), pages 637-654, May-June.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Alexander S. Sangare, 2005. "Efficience des marchés : un siècle après Bachelier," Revue d'Économie Financière, Programme National Persée, vol. 81(4), pages 107-132.
    2. Klaus Schredelseker, 2012. "Finanzkrise — Mitschuld der Theorie?," Schmalenbach Journal of Business Research, Springer, vol. 64(8), pages 833-845, December.
    3. Heller, Yuval & Schreiber, Amnon, 2020. "Short-term investments and indices of risk," Theoretical Economics, Econometric Society, vol. 15(3), July.
    4. Carmine De Franco & Johann Nicolle & Huyên Pham, 2019. "Dealing with Drift Uncertainty: A Bayesian Learning Approach," Risks, MDPI, vol. 7(1), pages 1-18, January.
    5. Gordon G. Sollars & Sorin Tuluca, 2012. "The Optimal Timing of Strategic Action – A Real Options Approach," Journal of Entrepreneurship, Management and Innovation, Fundacja Upowszechniająca Wiedzę i Naukę "Cognitione", vol. 8(2), pages 78-95.
    6. Saggese, Pietro & Belmonte, Alessandro & Dimitri, Nicola & Facchini, Angelo & Böhme, Rainer, 2023. "Arbitrageurs in the Bitcoin ecosystem: Evidence from user-level trading patterns in the Mt. Gox exchange platform," Journal of Economic Behavior & Organization, Elsevier, vol. 213(C), pages 251-270.
    7. Andrei Kapaev, 2013. "Remark on repo and options," Papers 1311.5211, arXiv.org.
    8. Kaouther Toumi Lajimi & Rana El Bahsh & Serge Agbodjo, 2017. "The determinants of bank profitability, does Islamic ethics perspective matter ? A comprehensive study on Islamic banks vs. Conventional ones," Post-Print hal-04109833, HAL.
    9. Linnenluecke, Martina K. & Chen, Xiaoyan & Ling, Xin & Smith, Tom & Zhu, Yushu, 2017. "Research in finance: A review of influential publications and a research agenda," Pacific-Basin Finance Journal, Elsevier, vol. 43(C), pages 188-199.
    10. van den Bergh, Jeroen C.J.M., 2008. "Optimal diversity: Increasing returns versus recombinant innovation," Journal of Economic Behavior & Organization, Elsevier, vol. 68(3-4), pages 565-580, December.
    11. Monda, Barbara & Giorgino, Marco & Modolin, Ileana, 2013. "Rationales for Corporate Risk Management - A Critical Literature Review," MPRA Paper 45420, University Library of Munich, Germany.
    12. Xuan Vinh Vo & Kevin Daly, 2008. "Volatility amongst firms in the Dow Jones Eurostoxx50 Index," Applied Financial Economics, Taylor & Francis Journals, vol. 18(7), pages 569-582.
    13. Bessler, Wolfgang & Drobetz, Wolfgang & Henn Overbeck, Jacqueline, 2005. "Hedge Funds: Die Königsdisziplin" der Kapitalanlage," Working papers 2005/04, Faculty of Business and Economics - University of Basel.
    14. Lawrence White, 2004. "Mortgage Backed Securities: Another Way to Finance Housing," Working Papers 04-14, New York University, Leonard N. Stern School of Business, Department of Economics.
    15. Carmen López-Martín & Sonia Benito Muela & Raquel Arguedas, 2021. "Efficiency in cryptocurrency markets: new evidence," Eurasian Economic Review, Springer;Eurasia Business and Economics Society, vol. 11(3), pages 403-431, September.
    16. Scheuenstuhl, Gerhard & Zagst, Rudi, 2008. "Integrated portfolio management with options," European Journal of Operational Research, Elsevier, vol. 185(3), pages 1477-1500, March.
    17. He, Xue-Zhong & Li, Youwei, 2015. "Testing of a market fraction model and power-law behaviour in the DAX 30," Journal of Empirical Finance, Elsevier, vol. 31(C), pages 1-17.
    18. Jian Guo & Saizhuo Wang & Lionel M. Ni & Heung-Yeung Shum, 2022. "Quant 4.0: Engineering Quantitative Investment with Automated, Explainable and Knowledge-driven Artificial Intelligence," Papers 2301.04020, arXiv.org.
    19. Frank Figge, 2005. "Value‐based environmental management. From environmental shareholder value to environmental option value," Corporate Social Responsibility and Environmental Management, John Wiley & Sons, vol. 12(1), pages 19-30, March.
    20. Bas Peeters & Cees L. Dert & André Lucas, 2003. "Black Scholes for Portfolios of Options in Discrete Time: the Price is Right, the Hedge is wrong," Tinbergen Institute Discussion Papers 03-090/2, Tinbergen Institute.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:kap:compec:v:57:y:2021:i:4:d:10.1007_s10614-020-10024-2. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Sonal Shukla or Springer Nature Abstracting and Indexing (email available below). General contact details of provider: http://www.springer.com .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.