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One basic assumption of Black-Scholes model is that the stock price is log-normally distributed with constant volatility. However, in option market, does this assumption hold?
Member rating: No Rating | Words: | Submitted: Mon Dec 22 2003
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Introduction 2 Method used to exam mispricing problem of Black-Scholes model 2 Interpretation of the results 2 Conclusion 8 Reference: 9 Appendix 1: The raw data of lognormal distribution for Six Continent options on 18th, Feb 2003. 10 Appendix 2: The raw data of lognormal distribution for Six Continent options on 20th, Feb, 2003. 10 Appendix 3: The raw data of mixlognormal distribution for Six Continent options on 18th, Feb, 2003. 11 Appendix 4: The raw data of mixlognormal distribution for Six Continent options on 20th, Feb 2003 11 Introduction One basic assumption of Black-Scholes model is that the stock price is log-normally distributed with constant volatility. However, in option market, does this assumption hold? In our paper, we try to show how wrong Black-Scholes is by challenging this assumption and illustrate the difference between Black-Scholes and real world. Method used to exam mispricing problem of Black-Scholes model About Mixlognormal: The probability distribution of the stock price might be made up of a mixture of two lognormal distributions, one for...
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