| Purdue Computational Finance Program | |
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Option Pricing in Imperfect Markets with Discontinuous Returns
April 3, 2003 |
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Abstract:
Black and Scholes's model for option pricing assumes that the stock price follows a geometric Brownian motion and that the markets are perfect. The model has been generalized in many directions. We assume that the stock returns follow a jump diffusion process, the jump component representing non-systematic risk. We also assume that the markets are imperfect by imposing proportional transaction costs. We compute the total transaction costs for different options, transaction costs and revision intervals. |
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