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The Pricing of Stock Index Options in a General Equilibrium Model

Published online by Cambridge University Press:  06 April 2009

Warren Bailey  and
René M. Stulz
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Abstract

This paper analyzes the pricing of stock index options in a simple general equilibrium model. In this model, the volatility of the stock index and the spot rate of interest are functions of a stochastic variable. The paper investigates the biases that arise when using the Black-Scholes model with the assumed volatility and interest rate dynamics. It is shown that the model can, in principle, explain the biases observed in empirical work on stock index options.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 24 , Issue 1 , March 1989 , pp. 1 - 12
Copyright
Copyright © School of Business Administration, University of Washington 1989

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