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Option Pricing And Stochastic Processes

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  • Vorst, A. C. F.

Abstract

In this paper I will try to describe how the theory of stochastic processes and especially of stochastic differential equations has influenced option pricing theory. In my view, this is one of the best examples of the application of sophisticated mathematics to a purely economic, or financial, problem. This is not only because of the fact that the theory describes the economic phenomena very well, but merely since the main results are used in every day practice by market makers. I will discuss the pricing of options on stocks and bonds and mention some other examples.

Suggested Citation

  • Vorst, A. C. F., 1988. "Option Pricing And Stochastic Processes," Econometric Institute Archives 272366, Erasmus University Rotterdam.
    • Handle: RePEc:ags:eureia:272366
    DOI: 10.22004/ag.econ.272366
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    References listed on IDEAS

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    1. Ball, Clifford A. & Torous, Walter N., 1983. "Bond Price Dynamics and Options," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 18(4), pages 517-531, December.
    2. Stulz, ReneM., 1982. "Options on the minimum or the maximum of two risky assets : Analysis and applications," Journal of Financial Economics, Elsevier, vol. 10(2), pages 161-185, July.
    3. Robert C. Merton, 2005. "Theory of rational option pricing," World Scientific Book Chapters, in: Sudipto Bhattacharya & George M Constantinides (ed.), Theory Of Valuation, chapter 8, pages 229-288, World Scientific Publishing Co. Pte. Ltd..
    4. Black, Fischer & Scholes, Myron S, 1973. "The Pricing of Options and Corporate Liabilities," Journal of Political Economy, University of Chicago Press, vol. 81(3), pages 637-654, May-June.
    5. Garman, Mark B. & Kohlhagen, Steven W., 1983. "Foreign currency option values," Journal of International Money and Finance, Elsevier, vol. 2(3), pages 231-237, December.
    6. Geske, Robert, 1979. "The valuation of compound options," Journal of Financial Economics, Elsevier, vol. 7(1), pages 63-81, March.
    7. Courtadon, Georges, 1982. "The Pricing of Options on Default-Free Bonds," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 17(1), pages 75-100, March.
    8. Cox, John C & Ingersoll, Jonathan E, Jr & Ross, Stephen A, 1985. "An Intertemporal General Equilibrium Model of Asset Prices," Econometrica, Econometric Society, vol. 53(2), pages 363-384, March.
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