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Option pricing with a non‐zero lower bound on stock price
Author(s) -
Dong Ming
Publication year - 2005
Publication title -
journal of futures markets
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.88
H-Index - 55
eISSN - 1096-9934
pISSN - 0270-7314
DOI - 10.1002/fut.20159
Subject(s) - kurtosis , skewness , stock (firearms) , econometrics , economics , black–scholes model , geometric brownian motion , stock price , valuation of options , upper and lower bounds , mathematics , financial economics , statistics , mechanical engineering , volatility (finance) , paleontology , economy , diffusion process , series (stratigraphy) , engineering , biology , service (business) , mathematical analysis
Black, F. and Scholes, M. (1973) assume a geometric Brownian motion for stock prices and therefore a normal distribution for stock returns. In this article a simple alternative model to Black and Scholes (1973) is presented by assuming a non‐zero lower bound on stock prices. The proposed stock price dynamics simultaneously accommodate skewness and excess kurtosis in stock returns. The feasibility of the proposed model is assessed by simulation and maximum likelihood estimation of the return probability density. The proposed model is easily applicable to existing option pricing models and may provide improved precision in option pricing. © 2005 Wiley Periodicals, Inc. Jrl Fut Mark 25:775–794, 2005