On Stochastic Differential Equation and Modified Black-Scholes Option Pricing Model

5 Pages Posted: 10 Feb 2008

See all articles by Yao Zheng

Yao Zheng

Northern Illinois University - Department of Finance

Date Written: February 10, 2008

Abstract

This paper presents a theoretical analysis for option pricing in finance markets. Two modified Black-Scholes equations models are derived based on general stochastic differential equation. It is shown that one equation characterized only by volatility coefficient but another characterized by the coefficients of both drift and volatility. The constitutive conditions for the stochastic equation can be used to describe the Black-Scholes dynamic processes are established.

Keywords: Option pricing, Black-Scholes equation, stochastic differential equation

JEL Classification: G00, C00

Suggested Citation

Zheng, Yao, On Stochastic Differential Equation and Modified Black-Scholes Option Pricing Model (February 10, 2008). Available at SSRN: https://ssrn.com/abstract=1091823 or http://dx.doi.org/10.2139/ssrn.1091823

Yao Zheng (Contact Author)

Northern Illinois University - Department of Finance ( email )

Barsema Hall
740 Garden Road
DeKalb, IL 60115-2828
United States

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