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Pricing Individual Stock Options using both Stock and Market Index Information

 

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Abstract

When it comes to individual stock option pricing, most applications consider a univariate framework. From a theoretical point of view this is unsatisfactory as we know that the expected return of any asset is closely related to the exposure to the market risk factors. To address this, we model the evolution of the individual stock returns together with the market index returns in a flexible bivariate model in line with theory. We assess the model performance by pricing a large set of individual stock options on 26 major US stocks over a long time period including the global financial crisis.

ROMBOUTS Jeroen V.K. , ESSEC Business School, France
STENTOFT Lars , University of Western Ontario, Canada
VIOLANTE Francesco , CREST-ENSAE-ParisTech

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Pricing Individual Stock Options using both Stock and Market Index Information
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