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An Event Option Pricing Model with Scheduled and Unscheduled Announcement Effects

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  • Abraham, Abraham
  • Taylor, William M

Abstract

There is considerable evidence supporting the time-varying distribution of asset returns. There is also ample evidence that scheduled announcement events such as money supply announcements (in the case of foreign exchange), earnings announcements (in the case of stocks), and crop reports (in the case of commodities), as well as random unscheduled events, can affect the level and volatility of asset returns. This study provides an Event Model for European call options which explicitly addresses effects of these two classes of events. This specification requires estimation of more parameters, but it could provide a more accurate basis for pricing options than previous Poisson jump-diffusion models. Parametric analysis shows that the standard models under-price the options relative to the Event Model. The Event Model may be particularly useful in pricing short-term deep out-of-the-money options when scheduled events are present in the market. Copyright 1997 by Kluwer Academic Publishers

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  • Abraham, Abraham & Taylor, William M, 1997. "An Event Option Pricing Model with Scheduled and Unscheduled Announcement Effects," Review of Quantitative Finance and Accounting, Springer, vol. 8(2), pages 151-162, March.
    • Handle: RePEc:kap:rqfnac:v:8:y:1997:i:2:p:151-62
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    Cited by:

    1. Roberto Andreotti Bodra & Afonso De Campos Pint, 2014. "Modelo De Volatilidade Estocástica Com Saltos Aplicado A Commodities Agrícolas," Anais do XLI Encontro Nacional de Economia [Proceedings of the 41st Brazilian Economics Meeting] 142, ANPEC - Associação Nacional dos Centros de Pós-Graduação em Economia [Brazilian Association of Graduate Programs in Economics].

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