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| Author: | Corns, T.R.A. Satchell, S.E. |
| Title: | Skew Brownian motion and pricing European options |
| Journal: | European Journal of Finance
2007 : JUL/SEP, VOL. 13:5-6, p. 523-544 |
| Index terms: | financial markets options pricing models Europe |
| Language: | eng |
| Abstract: | This paper presents a new stochastic (hereafter as: stc.) process (as: proc.), which is a special case of the skew Brownian motion (as: B. mot.) of Ito and McKean. This process is the sum of a standard B. mot. and an independent reflecting B. mot., similar in construction to the stc. representation of a skew-normal random variable. This stc. proc. is taken in its exponential form for pricing European options. The derived option price nests the Black-Scholes equation as a special case and is flexible enough to accommodate stc. volatility as well as stc. skewness. |
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