Option Pricing Formulas based on a non-Gaussian Stock Price Model

Abstract

Options are financial instruments that depend on the underlying stock. We explain their non-Gaussian fluctuations using the nonextensive thermodynamics parameter $q$. A generalized form of the Black-Scholes (B-S) partial differential equation, and some closed-form solutions are obtained. The standard B-S equation ($q=1$) which is used by economists to calculate option prices requires multiple values of the stock volatility (known as the volatility smile). Using $q=1.5$ which well models the empirical distribution of returns, we get a good description of option prices using a single volatility.

final version (published)

References in corpus (1)

• Dynamical foundations of nonextensive statistical mechanics

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