This dissertation develops an option pricing model that is more general then previously developed option pricing models. Black and Scholes (1973) pioneered the development of a general equilibrium model of option pricing. However, most empirical studies have shown that it has some biases. / To overcome the problems inherent in Black-Sholes option pricing model, an alternative model is proposed in this dissertation. The model developed in this dissertation is based on the assumption that distributions of price relatives for the underlying security can be modeled as mixtures of truncated normal distributions; that is, as mixtures of truncated normal distributions with parameters that shift over time. These shifts can produce observed price relatives that can be regarded as "jumps" (these jumps presumably reflect random arrivals of new information). This assumption is consistent with empirical findings that most stock return distribution can be better described by mixtures of distributions than by other hypotheses. To incorporate changing variances and discrete trading, a time-state-preference is adopted. The state variables are parameters of probability distributions of price relatives for securities at future times for all states. These distributions are assumed to be truncated normal distributions and the resulting distributions at these future times represent mixtures of these truncated normal distributions. / This dissertation shows two major things: (1) A mixture of truncated normal distributions can be reasonably approximated by a properly defined gamma density function given certain ranges of parameters. When these parameters are extreme, the approximation is poor due to the presence of significant residual terms. Such poor approximations would be directly related to the magnitude and direction of mispricings of option. (2) Results of empirical test of gamma-based option model against the Black-Scholes model show that for the moderately-in-the-money subgroup of options, the gamma based option pricing model provides better estimates of option values. For other subgroups, the Manaster and Rendleman (1982) modification of the Black-Scholes model provides better estimates of option values. The original Black-Scholes model does not perform as well as the gamma-based model or the modified Black-Scholes model. / Source: Dissertation Abstracts International, Volume: 45-11, Section: A, page: 3422. / Thesis (Ph.D.)--The Florida State University, 1984.
| Identifer | oai:union.ndltd.org:fsu.edu/oai:fsu.digital.flvc.org:fsu_75447 |
| Contributors | YOO, TAE HOU., Florida State University |
| Source Sets | Florida State University |
| Detected Language | English |
| Type | Text |
| Format | 315 p. |
| Rights | On campus use only. |
| Relation | Dissertation Abstracts International |
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