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Article dans une revue Financial Stability Review Année : 2008

Taking into account extreme events in European option pricing

Résumé

According to traditional option pricing models,1 fi nancial markets underestimate the impact of tail risk. In this article, we put forward a European option pricing model based on a set of assumptions that ensure, inter alia, that extreme events are better taken into account. Using simulations, we compare the option prices obtained from the standard Black and Scholes model with those resulting from our model. We show that the traditional model leads to an overvaluation of at-the-money options, which are the most traded options, while the less liquid in-the-money and out-of-the-money options are undervalued.
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Dates et versions

halshs-00638450, version 1 (04-11-2011)

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  • HAL Id : halshs-00638450 , version 1

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Julien Idier, Caroline Jardet, Gaëlle Le Fol, Alain Monfort, Fulvio Pegoraro. Taking into account extreme events in European option pricing. Financial Stability Review, 2008, 12, pp.39-51. ⟨halshs-00638450⟩
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