Option Pricing with a Dividend General Equilibrium Model

Chourdakis, Kyriakos; Tzavalis, Elias

doi:10.2139/ssrn.252308

Option Pricing with a Dividend General Equilibrium Model

45 Pages Posted: 1 Dec 2000

See all articles by Kyriakos Chourdakis

Elias Tzavalis

University of London - Queen Mary - Department of Economics

Date Written: November 2000

Abstract

This paper derives a general equilibrium option-pricing model for a European call assuming that the economy is exogenously driven by a dividend process following Hamilton's (1989) Markov regime switching model. The derived formula is used to investigate if the European call option prices are consistently priced with the stock market prices. This is done by obtaining the implied risk aversion preferences, based on traded option prices data.

Keywords: Markov regime switching, Option pricing, Risk aversion, Volatility smile

JEL Classification: G12, G13, C22, C52

Suggested Citation: Suggested Citation

Chourdakis, Kyriakos and Tzavalis, Elias, Option Pricing with a Dividend General Equilibrium Model (November 2000). Available at SSRN: https://ssrn.com/abstract=252308 or http://dx.doi.org/10.2139/ssrn.252308