Heterogeneous Information Arrival and Option Pricing / Patrick K. Asea, Mthuli Ncube.

Format:

Book

Author/Creator:

Asea, Patrick K.

Contributor:

National Bureau of Economic Research.

Ncube, Mthuli.

Series:

Working Paper Series (National Bureau of Economic Research) no. w5950.

NBER working paper series no. w5950

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 1997.

Summary:

We model the arrival of heterogeneous information in a financial market as a doubly-stochastic Poisson process (DSPP). A DSPP is a member of the family of Poisson processes in which the mean value of the process itself is governed by a stochastic mechanism. We explore the implications for pricing stock, index and foreign currency options of the assumption that the under- lying security evolves as a mixed diffusion DSPP. We derive an intertemporal CAPM and demonstrate that accounting for heterogeneous information arrival may minimize the ubiquitous pricing bias 'smile-effect' of standard option pricing models. We propose a conceptually simple but numerically intensive maximum likelihood estimator of the parameters of a DSPP. A simulation study verifies the adequacy of the asymptotic approximations in finite samples.

Notes:

Print version record

March 1997.