The effect of non-ideal market conditions on option pricing

Details The effect of non-ideal market conditions on option pricing The effect of non-ideal market conditions on option pricing

2001-12-03

arxiv.org/abs/cond-mat/0112033v1

Physica A 308, 420-442 (2002)

Physics

Condensed Matter

26 pages and 8 colored figures. Invited Talk in "Horizons in complex systems", Messina, 5-8 December 2001. To appear in Physic

Scientific paper

10.1016/S0378-4371(02)00627-1

Option pricing is mainly based on ideal market conditions which are well represented by the Geometric Brownian Motion (GBM) as market model. We study the effect of non-ideal market conditions on the price of the option. We focus our attention on two crucial aspects appearing in real markets: The influence of heavy tails and the effect of colored noise. We will see that both effects have opposite consequences on option pricing.

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