Abstract
Options are financial instruments that depend on the underlying stock. We explain their non-Gaussian fluctuations using the nonextensive thermodynamics parameter . A generalized form of the Black-Scholes (BS) partial differential equation and some closed-form solutions are obtained. The standard BS equation () which is used by economists to calculate option prices requires multiple values of the stock volatility (known as the volatility smile). Using which well models the empirical distribution of returns, we get a good description of option prices using a single volatility.
- Received 28 February 2002
DOI:https://doi.org/10.1103/PhysRevLett.89.098701
©2002 American Physical Society