Hostname: page-component-8448b6f56d-wq2xx Total loading time: 0 Render date: 2024-04-19T21:23:10.368Z Has data issue: false hasContentIssue false
  • English
  • Français

The Pricing of Stock Index Options in a General Equilibrium Model

Published online by Cambridge University Press:  06 April 2009

Warren Bailey  and
René M. Stulz
Get access Rights & Permissions [Opens in a new window]

Abstract

This paper analyzes the pricing of stock index options in a simple general equilibrium model. In this model, the volatility of the stock index and the spot rate of interest are functions of a stochastic variable. The paper investigates the biases that arise when using the Black-Scholes model with the assumed volatility and interest rate dynamics. It is shown that the model can, in principle, explain the biases observed in empirical work on stock index options.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 24 , Issue 1 , March 1989 , pp. 1 - 12
Copyright
Copyright © School of Business Administration, University of Washington 1989

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

Bailey, W. “Economic News and Asset Price Uncertainty.” Unpubl. Ph.D. Diss., Univ. of Calif., Los Angeles (1986).Google Scholar
Bick, A. “On the Consistency of the Black-Scholes Model with a General Equilibrium Framework.” Journal of Financial and Quantitative Analysis, 22 (09 1987), 259–276.CrossRefGoogle Scholar
Black, F., and Scholes, M.. “The Pricing of Options and Corporate Liabilities.” Journal of Political Economy, 81 (05/06 1973), 637–654.CrossRefGoogle Scholar
Breeden, D. T. “Consumption, Production, Inflation and Interest Rates: A Synthesis.” Journal of Financial Economics, 16 (05 1986), 3–40.CrossRefGoogle Scholar
Cox, J.; Ingersoll, J.; and Ross, S.. “An Intertemporal Equilibrium Model of Asset Prices.” Econometrica, 53 (03 1985a), 363–384.CrossRefGoogle Scholar
Cox, J.; Ingersoll, J.; and Ross, S.. “A Theory of the Term Structure of Interest Rates.” Econometrica, 53 (03 1985b), 385–407.CrossRefGoogle Scholar
Evnine, J., and Rudd, A.. “Index Options: The Early Evidence.” Journal of Finance, 40 (07 1985), 743–755.CrossRefGoogle Scholar
Fama, E. F., and Schwert, G. W.. “Asset Returns and Inflation.” Journal of Financial Economics, 5 (11 1977), 115–146.CrossRefGoogle Scholar
Garman, M. B., and Kohlhagen, J. W.. “Foreign Currency Option Values.” Journal of International Money and Finance, 2 (12 1983), 231–237.CrossRefGoogle Scholar
Geske, R., and Trautman, S.. “Option Valuation: Theory and Empirical Evidence,” in Capital Market Equilibria, Bamberg, G. and Spremann, K., eds. Berlin: Springer-Verlag (1986).Google Scholar
Gourlay, A. R., and McKee, S.. “The Construction of Hopscotch Methods for Parabolic and Elliptic Equations in Two Space Dimensions with a Mixed Derivative.” Journal of Applied and Computational Mathematics, 3 (09 1977), 201–206.CrossRefGoogle Scholar
Hull, J., and White, A.. “The Pricing of Options on Assets with Stochastic Volatilities.” Journal of Finance, 42 (06 1987), 281–301.CrossRefGoogle Scholar
Johnson, H., and Shanno, D.. “Option Pricing when the Variance is Changing.” Journal of Financial and Quantitative Analysis, 22 (06 1987), 143–153.CrossRefGoogle Scholar
Merton, R. C. “Optimum Consumption and Portfolio Rules in a Continuous-Time Model.” Journal of Economic Theory, 3 (12 1971), 373–413.CrossRefGoogle Scholar
Ramaswamy, K., and Sundaresan, S.. “The Valuation of Options on Futures Contracts.” Journal of Finance, 40 (12 1985), 1319–1341.CrossRefGoogle Scholar
Scott, L. “Option Pricing when the Variance Changes Randomly: Theory, Estimation, and Application.” Journal of Financial and Quantitative Analysis, 22 (12 1987), 419–438.CrossRefGoogle Scholar
Shastri, K., and Tandon, K.. “An Empirical Test of a Valuation Model for American Options on Futures Contracts.” Journal of Financial and Quantitative Analysis, 21 (12 1986), 377–392.CrossRefGoogle Scholar
Stulz, R. “Options on the Minimum or the Maximum of Two Risky Assets.” Journal of Financial Economics, 10 (07 1983), 80–121.Google Scholar
Whaley, R. “Valuation of American Futures Options: Theory and Empirical Tests.” Journal of Finance, 41 (03 1986), 127–150.CrossRefGoogle Scholar
Wiggins, J. “Stochastic Volatility Option Valuation: Theory and Empirical Estimates.” Journal of Financial Economics, 19 (12 1987), 351–372.CrossRefGoogle Scholar