Abstract
This study tests the validity of the critical assumption underlying the option pricing model that the log form of the stock price movements follows the Wiener process, i.e., stock price movements follow a geometric Brownian motion. Using data compiled from the Taiwan Stock Exchange (TSE), this study's major empirical findings are as follows: first, the null hypothesis that the log of the stock prices is normally distributed is rejected; second, the null hypothesis that the stock price in log form has mean [ln P s + (µ- \( - \frac{1}{2}\) σ2)t] and variance αt is rejected; third, the null hypothesis that successive non-overlapping increments of the log of the stock price are independent from each other is also rejected. These empirical findings undermine the validity of the Wiener process assumption which is fundamental to many option pricing models.
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Yen, G., Yen, E.C. On the Validity of the Wiener Process Assumption in Option Pricing Models: Contradictory Evidence from Taiwan. Review of Quantitative Finance and Accounting 12, 327–340 (1999). https://doi.org/10.1023/A:1008309307499
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DOI: https://doi.org/10.1023/A:1008309307499