Testing Option Pricing Models: Complete and Incomplete Markets

Verchenko, Olesia

doi:10.2139/ssrn.1823449

Cited by 1 publication

(1 citation statement)

References 43 publications

Supporting

Mentioning

Contrasting

Order By: Relevance

“…In Complete market, market players can make the exchange of goods or assets directly or indirectly in the absence of transaction costs that do not allow for arbitration even without risk arbitrage, where it is impossible in incomplete. Incomplete market is more complicated than complete market, where this model consists of uncertainty sources (Verchenko, 2010). From the perspective of theory, incomplete market is a complex learning (Staum, 2007), because market circumstances in the real world that is not affected by many factors remain that cannot be explained with certainty.…”

Section: Introductionmentioning

confidence: 99%

European Call Option Application in Incomplete Market-Analysis and Development

Rachmawati¹,

Sufon²,

Budiharto³

2014

Journal of Computer Science

View full text Add to dashboard Cite

Option is derivative instrument that have investment benefit and provide return for the writer and the holder. Option price determination is affected by risk factor. However in Black-Scholes model option price is determined without arbitrage risk affection so it is impossible to take return. In this study, option price formula is constructed to be more represent the condition of financial market using incomplete market concept where financial asset, that is traded, is affected by arbitrage risk so it is possible for market participants to take return. European call option is defined by Esscher Transform method and option price formula is determined by changing its form to linear approximation. The result from this study is option price formula with linear approximation has some privileges. That is easy to be applied in computation process, more representatives in getting risk indication in the financial market and can predict option price more accurately. Linear approximation formula is applied in the program that can be used by option writer or holder and is equipped with export data feature that can be possible for further research development.

show abstract

Section: Introductionmentioning

confidence: 99%