NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Heterogeneous Information Arrival and Option Pricing

Patrick K. Asea, Mthuli Ncube

NBER Working Paper No. 5950
Issued in March 1997
NBER Program(s):   AP

We model the arrival of heterogeneous information in a financial market as a doubly-stochastic Poisson process (DSPP). A DSPP is a member of the family of Poisson processes in which the mean value of the process itself is governed by a stochastic mechanism. We explore the implications for pricing stock, index and foreign currency options of the assumption that the under- lying security evolves as a mixed diffusion DSPP. We derive an intertemporal CAPM and demonstrate that accounting for heterogeneous information arrival may minimize the ubiquitous pricing bias 'smile-effect' of standard option pricing models. We propose a conceptually simple but numerically intensive maximum likelihood estimator of the parameters of a DSPP. A simulation study verifies the adequacy of the asymptotic approximations in finite samples.

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Document Object Identifier (DOI): 10.3386/w5950

Published: Asea, Patrick K. & Ncube, Mthuli, 1998. "Heterogeneous information arrival and option pricing," Journal of Econometrics, Elsevier, vol. 83(1-2), pages 291-323. citation courtesy of

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