Information-time option pricing: theory and empirical evidence1We would like to thank Robert Merton, Peter Ritchken, L. Sankarasubramanian, David Shimko, and Mark Weinstein for useful discussions. We are indebted to John B. Long, Jr. (the editor) and Robert Whaley (the referee) for detailed and constructive comments and suggestions. Any remaining errors are the responsibility of the authors.1

Carolyn W. Chang; Jack S.K. Chang; Kian-Guan Lim

doi:10.1016/s0304-405x(98)00009-9

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Journal of Financial Economics Vol. 48 No. 2 1998

Information-time option pricing: theory and empirical evidence1We would like to thank Robert Merton, Peter Ritchken, L. Sankarasubramanian, David Shimko, and Mark Weinstein for useful discussions. We are indebted to John B. Long, Jr. (the editor) and Robert Whaley (the referee) for detailed and constructive comments and suggestions. Any remaining errors are the responsibility of the authors.1

Carolyn W. Chang^1,2; Jack S.K. Chang; Kian-Guan Lim¹

¹ National University of Singapore · ² California State University, Fullerton

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Abstract

With a stochastic time change from calendar-time to information-time, we derive a parsimonious option pricing formula with stochastic volatility as a risk-neutral Poisson sum of Merton's (1973) prices over the option's information-time maturity domain. The formula contains two unobservable parameters, information arrival intensity and information-time asset volatility, with stochastic volatility induced by random information arrival. When the information arrival rate intensifies, the option price increases and vice-versa. We test the formula in pricing, hedging, and excess profits capture empirically using currency and the S&P 500 futures options transaction data.

DOI: 10.1016/s0304-405x(98)00009-9
Volume: 48
Issue: 2
Pages: 211-242
Language: en
Sources: openalex crossref bibtex:phds-export.bib

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