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    How does duration between trades of underlying securities affect option prices?

    Cartea, Alvaro and Meyer-Brandis, T. (2007) How does duration between trades of underlying securities affect option prices? Working Paper. Birkbeck, University of London, London, UK.

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    Abstract

    We propose a model for stock price dynamics that explicitly incorporates random waiting times between trades, also known as duration, and show how option prices can be calculated using this model. We use ultra-high-frequency data for blue-chip companies to motivate a particular choice of waiting-time distribution and then calibrate risk-neutral parameters from options data. We also show that the convexity commonly observed in implied volatilities may be explained by the presence of duration between trades. Furthermore, we find that, ceteris paribus, implied volatility decreases in the presence of longer durations, a result consistent with the findings of Engle (2000) and Dufour and Engle (2000) which demonstrates the relationship between levels of activity and volatility for stock prices.

    Metadata

    Item Type: Monograph (Working Paper)
    Additional Information: BWPEF 0721
    School: Birkbeck Schools and Departments > School of Business, Economics & Informatics > Economics, Mathematics and Statistics
    Depositing User: Administrator
    Date Deposited: 26 Mar 2019 14:45
    Last Modified: 29 Jul 2019 19:08
    URI: http://eprints.bbk.ac.uk/id/eprint/26867

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