Pricing of Guaranteed Stop Orders

27 Pages Posted: 5 Nov 2012

See all articles by Andreas Rathgeber

Andreas Rathgeber

University of Augsburg - Institute of Materials Resource Management

Date Written: June 6, 2012

Abstract

In this article we analyse the effects of Guaranteed Stop Orders on shares in the German stock index DAX. We briefly explain how Guaranteed Stop Orders work and then we develop a jump process, which is based on a Variance Gamma Process, to model the share prices. We show, by means of simulations, that the pay‐off of a Guaranteed Stop Order is foremost governed by the volatility in the underlying shares’ intraday and overnight movements. We also demonstrate that the common linear approach to price‐guaranteed stop orders is too general and needs to be refined to show the differences between shares adequately. We show that the recent turbulence on the stock markets around the world has made the Guaranteed Stop Order more interesting and that, during normal periods, this order type was nearly irrelevant.

Suggested Citation

Rathgeber, Andreas, Pricing of Guaranteed Stop Orders (June 6, 2012). 29th International Conference of the French Finance Association (AFFI) 2012. Available at SSRN: https://ssrn.com/abstract=2084101 or http://dx.doi.org/10.2139/ssrn.2084101

Andreas Rathgeber (Contact Author)

University of Augsburg - Institute of Materials Resource Management ( email )

Augsburg, 86159
Germany

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