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Option Valuation: Theory and Empirical Evidence

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Capital Market Equilibria

Summary

This paper reviews option valuation theory and the empirical evidence. The rapid growth of interest in option theory is probably due to the abundance of relevant applications in the financial marketplace. The precision of the option valuation models relies primarily on preference-free, enforceable arbitrage conditions. First, these arbitrage conditions are reviewed, and the related partial equilibrium hedging models are discussed. Next, the more general equilibrium, non-hedging models are briefly surveyed. Then, the differences in options on equity, debt, currency, and futures are mentioned, along with other applications of option theory.

Most of the empirical work testing the arbitrage boundaries has been related to equities, where the market data originated. Empirical tests of the boundaries and tests comparing various option models are reviewed for options on a variety of underlying assets. The estimation problems most relevant to option pricing are also discussed.

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Authors
  1. Robert Geske
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  2. Siegfried Trautmann
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Editors and Affiliations

  1. Institut für Statistik und Mathematische Wirtschaftstheorie, Universität Augsburg, Memminger Straße 14, D-8900, Augsburg, Germany

    Günter Bamberg

  2. Abteilung Wirtschaftswissenschaften, Universität Ulm, Oberer Eselsberg, D-7900, Ulm, Germany

    Klaus Spremann

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Geske, R., Trautmann, S. (1986). Option Valuation: Theory and Empirical Evidence. In: Bamberg, G., Spremann, K. (eds) Capital Market Equilibria. Springer, Berlin, Heidelberg. https://doi.org/10.1007/978-3-642-70995-1_4

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  • DOI: https://doi.org/10.1007/978-3-642-70995-1_4

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