NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

The Pricing of Short-Lived Options When Price Uncertainty Is Log-Symmetric Stable

J. Huston McCulloch

NBER Working Paper No. 264
Issued in July 1978

The well-known option pricing formula of Black and Scholes depends upon the assumption that price fluctuations are log-normal. However, this formula greatly underestimates the value of options with a low probability of being exercised if, as appears to be more nearly the case in most markets, price fluctuations are in fact symmetrics table or log-symmetric stable. This paper derives a general formula for the value of a put or call option in a general equilibrium, expected utility maximization context. This general formula is found to yield the Black-Scholes formula for a wide variety of underlying processes generating log-normal price uncertainty. It is then used to derive the value of a short-lived option for certain processes that generate log-symmetric stable price uncertainty. Our analysis is restricted to short-lived options for reasons of mathematical tractability. Nevertheless, the formula is useful for evaluating many types of risk.

download in pdf format
   (167 K)

email paper

Machine-readable bibliographic record - MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.3386/w0264

Published: McCulloch, J. Huston. "The Value of European Options and Log-Stable Uncertainty," International Advances in Economic Research. Volume 3, Number 4 / November, 1997

 
Publications
Activities
Meetings
NBER Videos
Themes
Data
People
About

National Bureau of Economic Research, 1050 Massachusetts Ave., Cambridge, MA 02138; 617-868-3900; email: info@nber.org

Contact Us