OPTION PRICING in MARKETS with INFORMED TRADERS

Yuan Hu, Abootaleb Shirvani, Stoyan Stoyanov, Young Shin Kim, Frank J. Fabozzi, Svetlozar T. Rachev

Research output: Contribution to journalArticlepeer-review

Abstract

The objective of this paper is to introduce the theory of option pricing for markets with informed traders within the framework of dynamic asset pricing theory. We introduce new models for option pricing for informed traders in complete markets, where we consider traders with information on the stock price direction and stock return mean. The Black-Scholes-Merton option pricing theory is extended for markets with informed traders, where price processes are following continuous-diffusions. By doing so, the discontinuity puzzle in option pricing is resolved. Using market option data, we estimate the implied surface of the probability for a stock upturn, the implied mean stock return surface, and implied trader information intensity surface.

Original languageEnglish
Article number2050037
JournalInternational Journal of Theoretical and Applied Finance
Volume23
Issue number6
DOIs
StatePublished - Sep 1 2020

Keywords

  • European call option prices for inform traders
  • Theory of option pricing
  • markets with informed traders

Fingerprint Dive into the research topics of 'OPTION PRICING in MARKETS with INFORMED TRADERS'. Together they form a unique fingerprint.

Cite this