Pricing Individual Stock Options using both Stock and Market Index Information
Lars Stentoft | University of Western Ontario
When it comes to individual stock option pricing, most, if not all, applications consider a univariate framework in which the dynamics of the underlying asset is considered without taking the evolution of the market or any other risk factors into consideration. From a theoretical point of view this is clearly unsatisfactory as we know, i.e. from the Capital Asset Pricing Model, that the expected return of any asset is closely related to the exposure to the market risk factor. On top of this theoretical inconsistency in empirical applications it is often difficult to precisely assess and appropriately measure risk premia from individual stock returns alone. To address these shortcomings, we model the evolution of the individual stock returns together with the market index returns in a bivariate model that allows us to estimate risk premia in line with the theory. We assess the performance of the model by pricing individual stock options on the constituent stocks in the Dow Jones Industrial Average over a long time period including the recent Global Financial Crisis.
Lars Stentoft is Associate Professor in the Departments of Economics and of Statistical and Actuarial Sciences at Western University, where he holds the Canada Research Chair in Financial Econometrics. He has been a faculty member at Western since 2014 and prior to this he held positions at HEC Montreal and Copenhagen Business School. Dr. Stentoft’s research focuses on financial econometrics, computational finance and longevity risk, with publications appearing in Journal of Banking and Finance, Journal of Empirical Finance, Journal of Financial Econometrics, Journal of Computational Finance, Management Science, Insurance: Mathematics and Economics and the Risk Management & Insurance Review.
Contact at the MS2Discovery Research Institute: Mark Reesor (Hosts of the speaker, Tecton 7: Mathematical Models in Finance and Tecton 8)
Refreshments will be provided
October 17, 2017
2:30pm | Location: LH3058
The MS2Discovery Seminar Series:
Wilfrid Laurier University, 75 University Avenue West, Waterloo
This event is hosted by the MS2Discovery Interdisciplinary Research Institute | Waterloo