Taking into account extreme events in European option pricing
Idier, Julien; Jardet, Caroline; Le Fol, Gaëlle; Monfort, Alain; Pegoraro, Fulvio (2008), Taking into account extreme events in European option pricing, Financial Stability Review, 12, p. 39-51
TypeArticle accepté pour publication ou publié
Journal nameFinancial Stability Review
Banque de France
MetadataShow full item record
Abstract (EN)According to traditional option pricing models, financial markets underestimate the impact of tail risk. In this article, we put forward a European option pricing model based on a set of assumptions that ensure, inter alia, that extreme events are better taken into account. Using simulations, we compare the option prices obtained from the standard Black and Scholes model with those resulting from our model. We show that the traditional model leads to an overvaluation of at-the-money options, which are the most traded options, while the less liquid in-the-money and out-of-the-money options are undervalued.
Subjects / Keywordstail risk; option pricing models
JELG19 - Other
Showing items related by title and author.
Le Fol, Gaëlle; Jardet, Caroline; Idier, Julien (2009) Article accepté pour publication ou publié
Euro money market interest rate dynamics and volatility: how they respond to recent changes in the operational framework Jardet, Caroline; Le Fol, Gaëlle (2010) Article accepté pour publication ou publié
Le Fol, Gaëlle; Idier, Julien; Borgy, Vladimir (2010-03) Document de travail / Working paper
The use of option, method of resolving disputes under the coordination of laws in the European Economic Community: the case of the Seventh Directive on consolidated accounts. Bensadon, Didier (2009) Communication / Conférence
Lardic, Sandrine; Dossou, François; Michalon, Karine (2008) Article accepté pour publication ou publié