Publication: European option pricing model with generalized Ornstein–Uhlenbeck process under stochastic earning yield and stochastic dividend yield
Issued Date
2019-12-01
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ISSN
16871847
16871839
16871839
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2-s2.0-85068763078
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Mahidol University
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SCOPUS
Bibliographic Citation
Advances in Difference Equations. Vol.2019, No.1 (2019)
Suggested Citation
N. Phewchean, Y. Wu European option pricing model with generalized Ornstein–Uhlenbeck process under stochastic earning yield and stochastic dividend yield. Advances in Difference Equations. Vol.2019, No.1 (2019). doi:10.1186/s13662-019-2210-5 Retrieved from: https://repository.li.mahidol.ac.th/handle/123456789/51203
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Title
European option pricing model with generalized Ornstein–Uhlenbeck process under stochastic earning yield and stochastic dividend yield
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Abstract
© 2019, The Author(s). This paper aims to examine and establish the models for European option pricing which include parameters of stochastic dividend yield and stochastic earning yield. We generalize the Ornstein–Uhlenbeck process and define it as generalized Ornstein–Uhlenbeck process. We have learned that the firm stocks, according to Black–Scholes–Merton structure, obey the geometric Brownian motion process. Under a stochastic earning yield, the dividend yield complies with the generalized Ornstein–Uhlenbeck process. The firm dividend randomly deviates from the earning yield flow because of the presence of stochastic components of dynamic Wiener process of generalized Ornstein–Uhlenbeck. In this study, we model the stock price with stochastic earning yield, and stochastic dividend yield to be taking account stochastic market price of risk parameter which is mean-reverting as well. We developed explicit formulae for European call option pricing calculations. From numerical simulation, we could evaluate the performance of our new model that could be compared with other notable option pricing models by using actual option price data. The outcomes prove that our new model performance is best when compared with others.