A Binomial Model of Asset and Option Pricing with Heterogeneous Beliefs
نویسنده
چکیده
This paper provides a theoretical framework for pricing assets in a multiperiod economy with heterogeneous beliefs. The stock price dynamics follow a binomial lattice structure. Agents are allowed to differ in their beliefs of the probability and asset return in each state of nature. By constructing a consensus belief, we examine the impact of heterogeneous beliefs on market equilibrium. Statically, divergence of opinions leads to lower risk premium, greater divergence of opinions regarding future return in the upstate (downstate) leads to lower (higher) expected return for the risky asset and the risk-free rate. Dynamically, we show that the consensus belief is a fair belief to price options since agents’ wealth share process is a martingale under the consensus belief. Furthermore, call option prices exhibit implied volatility skew when the optimistic (pessimistic) agent is also confident (doubtful) about future asset returns. JEL Classification: G12, D84.
منابع مشابه
ارائه یک روش تلفیقی جهت قیمت گذاری اختیار معامله مبتنی بر دو مدل بلک شولز و درخت دوتایی (مطالعه موردی بازار بورس سهام ایران)
This paper suggests a composed option pricing model based on black-scholes and binomial tree models. So at first this two models are presented and analyzed. Then we showed black-scholes model is an appropriate option pricing model for stocks with low volatility and binomial trees model is an appropriate option pricing model for stocks with high volatility. Suggested model is a composed model of...
متن کاملOption pricing under the double stochastic volatility with double jump model
In this paper, we deal with the pricing of power options when the dynamics of the risky underling asset follows the double stochastic volatility with double jump model. We prove efficiency of our considered model by fast Fourier transform method, Monte Carlo simulation and numerical results using power call options i.e. Monte Carlo simulation and numerical results show that the fast Fourier tra...
متن کاملPRICING STOCK OPTIONS USING FUZZY SETS
We use the basic binomial option pricing method but allow someor all the parameters in the model to be uncertain and model this uncertaintyusing fuzzy numbers. We show that with the fuzzy model we can, with areasonably small number of steps, consider almost all possible future stockprices; whereas the crisp model can consider only n + 1 prices after n steps.
متن کاملA Dynamic Portfolio of American Option Using Fuzzy Binomial Method
A Dynamic Portfolio or Dynamic Asset Allocation is a strategy used to determine the proportion of a number of assets, chosen carefully, in order to achieve optimum performance of the portfolio. In this paper, the portfolio consists only Options traded in the financial market. One of the most famous models of option pricing is Binomial Cox-Ross-Rubinstein (CRR) Model. Using Fuzzy Binomial CRR pr...
متن کاملOptimal Geometric Mean Returns of Stocks and Their Options
The optimal geometric mean return is an important property of an asset. As a derivative of the underlying asset, the option also has this property. In this paper, we show that the optimal geometric mean returns of a stock and its option are the same from Kelly criterion. It is proved by using binomial option pricing model and continuous stochastic models with self-financing assumption. A simula...
متن کامل