Transaction Costs in Option Pricing: An Extension Model

DOI

10.2991/assehr.k.210407.056How to use a DOI?

Keywords

option pricing, transaction cost, Black-Scholes model

Abstract

This paper is divided into two parts. First, we consider a modified version of the Black-Scholes option pricing model which takes transaction costs into consideration by combining knowledge of Brownian Motion and Ito Process with mathematical tools of calculus, probability theory and mathematical statistics. Further, the solution of the model illustrates that introducing transaction costs greatly alters the levels of volatility. In part two, this paper illustrates plots of the result of the modified model by using python and empirical analysis by using R. It is found that the frequency of transaction volume adjustments and the ratio of transaction costs to call and put option results exhibit opposite behaviours in plots of result. What’s more, in empirical analysis, the modified model also gives a better simulation compared to original B-S model. Finally, further issues related to transaction costs are discussed.

Copyright

© 2021, the Authors. Published by Atlantis Press.

Open Access

This is an open access article distributed under the CC BY-NC license (http://creativecommons.org/licenses/by-nc/4.0/).

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TY  - CONF
AU  - Yunze Dong
PY  - 2021
DA  - 2021/04/08
TI  - Transaction Costs in Option Pricing: An Extension Model
BT  - Proceedings of the 2021 6th International Conference on Social Sciences and Economic Development (ICSSED 2021)
PB  - Atlantis Press
SP  - 276
EP  - 283
SN  - 2352-5398
UR  - https://doi.org/10.2991/assehr.k.210407.056
DO  - 10.2991/assehr.k.210407.056
ID  - Dong2021
ER  -