Article ID: | iaor201522876 |
Volume: | 10 |
Issue: | 1 |
Start Page Number: | 1 |
End Page Number: | 16 |
Publication Date: | Mar 1987 |
Journal: | Journal of Financial Research |
Authors: | Shanker Latha, Chang Jack S K |
Keywords: | investment |
This paper applies the arbitrage pricing theory to option pricing. Under certain distribution assumptions or the assumption that there is only one common factor, the underlying asset of an option is the sole risky factor that explains its expected return. Based upon this relationship, a new and simple option‐pricing formula is derived, and some important existing option‐pricing formulae are reproduced. Empirical results show that the new formula performs as well as the Black‐Scholes formula.