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General equilibrium and risk neutral framework for option pricing with a mixture of distributions

Vitiello, L and Poon, SH (2008) 'General equilibrium and risk neutral framework for option pricing with a mixture of distributions.' Journal of Derivatives, 15 (4). 48 - 60. ISSN 1074-1240

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Abstract

This article develops a closed form risk-neutral valuation model for pricing European style options when the underlying has a mixture of transformed-normal distributions. Specifically, we introduce the mixture of g distributions which contains the mixture of normal and lognormal distributions as a special case. The risk neutral valuation relation is developed following Rubinstein [1976]; Brennan [1979] and Camara [2003] and is consistent with the framework of Heston [1993b] and Schroder [2004]. Our model encompasses several well known models and is particularly useful for pricing derivatives written on illiquid assets and derivatives that are themselves illiquid.

Item Type: Article
Subjects: H Social Sciences > HG Finance
Divisions: Faculty of Social Sciences > Essex Business School
Faculty of Social Sciences > Essex Business School > Essex Finance Centre
Depositing User: Jo Wiltshire
Date Deposited: 30 Aug 2013 15:10
Last Modified: 01 Feb 2019 15:15
URI: http://repository.essex.ac.uk/id/eprint/5401

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