Pricing Options With Price Limits and Market Illiquidity

Chuang Chang Chang, Huimin Chung, Tin I. Wang

Research output: Chapter in Book/Report/Conference proceedingChapterpeer-review

1 Scopus citations

Abstract

The effects of price limits and market illiquidity are crucial for pricing derivatives based on some underlying assets traded in the markets with a price limit rule and an illiquidity phenomenon. We develop models to value options for the cases of either the underlying assets encountering price limits and market illiquidity, or when the underlying assets are imposed with price limits and the options themselves show market illiquidity in this paper. The Black-Scholes (1973) model, the Krakovsky (1999) model, and the Ban, Choi, and Ku (2000) model are presented as special cases of our model. Our numerical results show that both the price limit and market illiquidity significantly affect the option values.

Original languageEnglish
Title of host publicationResearch in Finance
PublisherJAI Press
Pages187-214
Number of pages28
ISBN (Print)0762312777, 9780762312771
DOIs
StatePublished - 1 Jan 2005

Publication series

NameResearch in Finance
Volume22
ISSN (Print)0196-3821

Fingerprint Dive into the research topics of 'Pricing Options With Price Limits and Market Illiquidity'. Together they form a unique fingerprint.

Cite this