McCauley, Joseph L. and Gunaratne, Gemunu H. (2003): On CAPM and Black-Scholes, differing risk-return strategies. Published in: Physica A , Vol. 329, (0203): pp. 170-177.
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In their path-finding 1973 paper Black and Scholes presented two separate derivations of their famous option pricing partial differential equation (pde). The second derivation was from the standpoint that was Black’s original motivation, namely, the capital asset pricing model (CAPM). We show here, in contrast, that the option valuation is not uniquely determined; in particular, strategies based on the delta-hedge and CAPM provide different valuations of an option although both hedges are instantaneouly riskfree. Second, we show explicitly that CAPM is not, as economists claim, an equilibrium theory.
|Item Type:||MPRA Paper|
|Institution:||University of Houston|
|Original Title:||On CAPM and Black-Scholes, differing risk-return strategies|
|Keywords:||Capital asset pricing model (CAPM); nonequilibrium; financial markets; Black-Scholes; option pricing strategies;|
|Subjects:||C - Mathematical and Quantitative Methods > C0 - General
D - Microeconomics > D5 - General Equilibrium and Disequilibrium > D53 - Financial Markets
C - Mathematical and Quantitative Methods > C6 - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling > C65 - Miscellaneous Mathematical Tools
|Depositing User:||Joseph L. McCauley|
|Date Deposited:||09. Mar 2007|
|Last Modified:||11. Feb 2013 23:45|
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