Publication detail

Drawbacks and Limitations of Black-Scholes Model for Options Pricing

JANKOVÁ, Z.

Original Title

Drawbacks and Limitations of Black-Scholes Model for Options Pricing

Type

journal article - other

Language

English

Original Abstract

The present paper focuses on the methods of derivative contract pricing. The basic differential equation of the popular Black-Scholes model for option contract pricing is derived. Furthermore, its less known modifications by Merton and Garman and Kohlhagen are pointed out. The paper refers to the significant drawbacks and limitations of the option pricing models that are based on constricting and unrealistic assumptions that often fail in comparison to the real market data. Attention is paid to the most serious problem, namely the issue of constant volatility, which is considerably disrupted in practice. Models implementing both stochastic and deterministic volatility in the original model are pointed out, their output being a more accurate option contract price.

Keywords

Differential equations, financial derivatives, Black-Scholes model, GARCH, volatility.

Authors

JANKOVÁ, Z.

Released

10. 8. 2018

Publisher

IBIMA Publishing

ISBN

2166-000X

Periodical

Journal of Financial Studies & Research

Year of study

2018

Number

1

State

United States of America

Pages from

1

Pages to

7

Pages count

7

BibTex

@article{BUT149160,
  author="Zuzana {Janková}",
  title="Drawbacks and Limitations of Black-Scholes Model for Options Pricing",
  journal="Journal of Financial Studies & Research",
  year="2018",
  volume="2018",
  number="1",
  pages="1--7",
  doi="10.5171/2018.179814",
  issn="2166-000X"
}