Article history: Received 18 November 2010 Accepted 12 September 2011 Available online 17 September 2011 This paper evaluates and compares asset pricing models in the Korean stock market. The asset pricing models considered are the CAPM, APT-motivated models, the Consumption-based CAPM, Intertemporal CAPM-motivated models, and the Jagannathan and Wang conditional CAPM model. By using various te...

The extreme volatility of stock market values has been the subject of a large body of literature. Previous research focused on the short run because of a widespread belief that in the long run the market reverts to well-established fundamentals. The authors’ research suggests this belief should be questioned. First, they show actual dividends cannot account for the secular trends of stock marke...

An option pricing formula is obtained, based on a stochastic model with statistical feedback. The fluctuations evolve according to a Tsallis distribution which fits empirical data for stock returns. A generalized form of the Black-Scholes partial differential equation is derived, parametrized by the Tsallis entropic index q. A martingale representation is found, which allows us to use concepts ...

The reload provision in an employee stock option is an option enhancement that allows the employee to pay the strike upon exercising the stock option using his owned stocks and to receive new “reload” stock options. The usual Black-Scholes risk neutral valuation approach may not be appropriate to be adopted as the pricing vehicle for employee stock options, due to the non-transferability of the...

We show how no-arbitrage pricing can be extended to some non-semimartingale models by restricting the class of admissible strategies. However, this restricted class is big enough to cover hedges for relevant options. Moreover, we show that the hedging prices depend essentially only on a path property of the stock price process, viz. on the quadratic variation. As a consequence, we can incorpora...

In this paper, the American exchange option (AEO) valuation problem is modelled as a free boundary problem. The critical stock price for an AEO is satisfied an integral equation implicitly. When the remaining time is large enough, an asymptotic formula is provided for pricing an AEO. The numerical results reveal that our asymptotic pricing formula is robust and accurate for the long-term AEO. K...

Options are financial instruments designed to protect investors from the stock market randomness. In 1973, Fisher Black, Myron Scholes and Robert Merton proposed a very popular option pricing method using stochastic differential equations within the Itô interpretation. Herein, we derive the Black-Scholes equation for the option price using the Stratonovich calculus along with a comprehensive re...

This paper discusses the option pricing problems using statistical series expansion for the price process of an underlying asset. We derive the Edgeworth expansion for the stock log return via extracting dynamics structure of time series. Using this result, we investigate influences of the non-Gaussianity and the dependency of log return processes for option pricing. Numerical studies show some...

Pricing options on known-dividend-paying stocks has traditionally been solved by assuming that the stock price minus the present value of dividends follows the lognormal diffusion. The same assumption is also popular in tree methods to avoid combinatorial explosion. Unfortunately, this assumption undervalues the option since the volatility of the underlying stock price is underestimated. The bi...

We consider callable Russian options with the finite maturity. Callable Russian option is a contract that the seller and the buyer have the rights to cancel and to exercise it at any time, respectively. We discuss the pricing model of callable Russian options when the stock pays dividends continuously. We show that the pricing model can be formulated as a coupled optimal stopping problem which ...