Bayesian Analysis of the Black-Scholes Option Price
Satchell, Stephen E.
Cambridge Working Papers in Economics
Faculty of Economics
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Darsinos, T., & Satchell, S. E. (2004). Bayesian Analysis of the Black-Scholes Option Price. https://doi.org/10.17863/CAM.5443
This paper investigates the statistical properties of the Black-Scholes option price under a Bayesian approach. We incorporate randomness, both in the price process and in volatility, to derive the prior and posterior densities of a European call option. Expressions for the density of the option price conditional on the sample estimates of volatility and on the asset price respectively, are also derived. Numerical results are presented to compare how the dispersion of the option price changes in the transition from prior to posterior information, where information may be price or sample variance or both.
This record's DOI: https://doi.org/10.17863/CAM.5443
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