An examination of valuation models for American call options on dividend paying stocks: Australian evidence

Graham, Paul. (1994). An examination of valuation models for American call options on dividend paying stocks: Australian evidence Honours Thesis, Department of Commerce, The University of Queensland.

       
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Author Graham, Paul.
Thesis Title An examination of valuation models for American call options on dividend paying stocks: Australian evidence
School, Centre or Institute Department of Commerce
Institution The University of Queensland
Publication date 1994
Thesis type Honours Thesis
Total pages 126
Language eng
Subjects 15 Commerce, Management, Tourism and Services
Formatted abstract In this thesis Australian evidence is provided on the pricing ability and mispricing biases of three American call option pricing models which adjust for the payment of dividends to the holders of the underlying stock. The approach developed by Roll (1977), Geske (1979) and Whaley (1981) provides an exact adjustment to the Black and Scholes (1973) European option pricing model for dividend payments and the possibility that the option may be exercised before maturity. The other two models, while more simplistic, only provide approximate adjustments for these two factors. In addition to the analysis of these models, this thesis examines the effects of non-simultaneity of closing option and stock trades on option pricing model studies. These effects are controlled for in the option pricing model tests. The results suggest that non-simultaneity of closing option and stock trades does induce ambiguity in the findings of option pricing model studies. When these effects are controlled for all of the models examined are found to underprice options when compared to market prices. Further, all of the models exhibit mispricing biases in relation to: the volatility of the underlying stock; the time to maturity of the option; and strike price of the option. The Roll-Geske-Whaley model is found to have superior pricing performance when compared to the two approximation techniques.

 
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Created: Tue, 19 Oct 2010, 17:47:38 EST by Muhammad Noman Ali on behalf of Social Sciences and Humanities Library Service