ARBITRAGE-FREE OPTION PRICING MODELS

摘要

We describe a scheme for constructing explicitly solvable arbitrage-free models for stock price. This isused to study a model similar to one introduced by Cox and Ross, where the volatility of the stock isproportional to the square root of the stock price. We derive a formula for the value of a European calloption based on this model and give a procedure for estimating parameters and for testing the validity ofthe model.