Derivative Pricing Beyond Black—Scholes
In the two preceding chapters, we have observed that the price dynamics of real-world securities differs significantly from geometric Brownian motion, most importantly by fat tails in the return distributions and by volatility correlations. The fundamental assumptions behind the Black-Scholes theory of option pricing and hedging do not hold in real markets. More general methods which include these stylized facts are called for.
KeywordsOption Price Implied Volatility Geometric Brownian Motion Residual Risk Forward Contract
Unable to display preview. Download preview PDF.