Pricing options on assets with predictable white noise returns

Leon, Angel and Sentana, Enrique (1997) Pricing options on assets with predictable white noise returns. Financial Markets Group Discussion Papers (267). Financial Markets Group, The London School of Economics and Political Science, London, UK.

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Abstract

We study the effect of predictability of an asset's return on the prices of options on that asset, for models in which returns are serially uncorrelated, yet predictable on the basis of a larger information set. We show that return predictability may matter in a discrete time world, especially for longer maturity options. However, discrepancies between the frequency of trading and observation become relevant in estimating the model parameters. When trading is continuous, Black-Scholes is valid, and the sample variance of holding returns over finite periods is an appropriate estimator of the variance of instantaneous returns.

Item Type:	Monograph (Discussion Paper)
Official URL:	https://www.fmg.ac.uk/
Additional Information:	© 1997 The Authors
Divisions:	Financial Markets Group
Subjects:	H Social Sciences > HG Finance H Social Sciences > HC Economic History and Conditions
JEL classification:	G - Financial Economics > G1 - General Financial Markets > G10 - General G - Financial Economics > G1 - General Financial Markets > G12 - Asset Pricing; Trading volume; Bond Interest Rates
Date Deposited:	17 May 2023 23:07
Last Modified:	14 Sep 2024 04:35
URI:	http://eprints.lse.ac.uk/id/eprint/119177

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