IDEAS home Printed from https://ideas.repec.org/h/spr/ihichp/978-3-540-49487-4_22.html
   My bibliography  Save this book chapter

Foundations of Option Pricing

In: Handbook on Information Technology in Finance

Author

Listed:
  • Peter Buchen

    (University of Sydney)

Abstract

In this chapter we lay down the foundations of option and derivative security pricing in the classical Black-Scholes (BS) paradigm. The two key assumptions in this approach are the absence of arbitrage and the modelling of asset prices by geometrical Brownian motion (gBm). No arbitrage is the driving mechanism for much of modern finance and still plays a dominant role in models extended beyond the BS framework. It is generally recognised that gBm, which implies Gaussian logreturns of asset prices, while good for analysis is rather a poor description of reality. Financial data very often show stylised features in their log-return distributions that are highly non-Gaussian. These include, heavy-tails (leptokurtosis), skewness, stochastic volatility and long-range dependence. Unfortunately, no model of asset prices capturing all, or even some of these features, is widely accepted by either theorists or practitioners.

Suggested Citation

  • Peter Buchen, 2008. "Foundations of Option Pricing," International Handbooks on Information Systems, in: Detlef Seese & Christof Weinhardt & Frank Schlottmann (ed.), Handbook on Information Technology in Finance, chapter 22, pages 515-542, Springer.
    • Handle: RePEc:spr:ihichp:978-3-540-49487-4_22
    DOI: 10.1007/978-3-540-49487-4_22
    as

    Download full text from publisher

    To our knowledge, this item is not available for download. To find whether it is available, there are three options:
    1. Check below whether another version of this item is available online.
    2. Check on the provider's web page whether it is in fact available.
    3. Perform a search for a similarly titled item that would be available.

    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:spr:ihichp:978-3-540-49487-4_22. 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.

    We have no bibliographic references for this item. You can help adding them by using 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.