Article1985

On Jumps in Common Stock Prices and Their Impact on Call Option Pricing

409 citations0/0 files storedThe Journal of Finance

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Stochastic processes and financial applications Financial Markets and Investment Strategies Financial Risk and Volatility Modeling

Abstract

ABSTRACT The Black‐Scholes call option pricing model exhibits systematic empirical biases. The Merton call option pricing model, which explicitly admits jumps in the underlying security return process, may potentially eliminate these biases. We provide statistical evidence consistent with the existence of lognormally distributed jumps in a majority of the daily returns of a sample of NYSE listed common stocks. However, we find no operationally significant differences between the Black‐Scholes and Merton model prices of the call options written on the sampled common stocks.

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References

1973The Pricing of Options and Corporate Liabilities 1976Option pricing when underlying stock returns are discontinuous 1975Fact and Fantasy in the Use of Options 1972THE VALUATION OF OPTION CONTRACTS AND A TEST OF MARKET EFFICIENCY 1985Nonparametric Tests of Alternative Option Pricing Models Using All Reported Trades and Quotes on the 30 Most Active CBOE Option Classes from August 23, 1976 Through August 31, 1978 1972The Valuation of Option Contracts and a Test of Market Efficiency 1979An Empirical Examination of the Black-Scholes Call Option Pricing Model 1967A Compound Events Model for Security Prices

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