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On Valuing American Call Options with the Black‐Scholes European Formula

Geske, Robert and Roll, Richard (1984) On Valuing American Call Options with the Black‐Scholes European Formula. Journal of Finance, 39 (2). pp. 443-455. ISSN 0022-1082. https://resolver.caltech.edu/CaltechAUTHORS:20190507-082705503

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Abstract

Empirical papers on option pricing have uncovered systematic differences between market prices and values produced by the Black‐Scholes European formula. Such “biases” have been found related to the exercise price, the time to maturity, and the variance. We argue here that the American option variant of the Black‐Scholes formula has the potential to explain the first two biases and may partly explain the third. It can also be used to understand the empirical finding that the striking price bias reverses itself in different sample periods. The expected form of the striking price bias is explained in detail and is shown to be closely related to past empirical findings.


Item Type:Article
Related URLs:
URLURL TypeDescription
https://doi.org/10.1111/j.1540-6261.1984.tb02319.xDOIArticle
https://www.jstor.org/stable/2327870JSTORArticle
Additional Information:© 1984 the American Finance Association. The authors are grateful for comments from David Emanuel, Dan Galai, Herbert Johnson, James MacBeth, and Mark Rubinstein. We thank the Institute for Quantitative Research in Finance for supporting this research.
Funders:
Funding AgencyGrant Number
Institute for Quantitative Research in FinanceUNSPECIFIED
Issue or Number:2
Record Number:CaltechAUTHORS:20190507-082705503
Persistent URL:https://resolver.caltech.edu/CaltechAUTHORS:20190507-082705503
Official Citation:GESKE, R. and ROLL, R. (1984), On Valuing American Call Options with the Black‐Scholes European Formula. The Journal of Finance, 39: 443-455. doi:10.1111/j.1540-6261.1984.tb02319.x
Usage Policy:No commercial reproduction, distribution, display or performance rights in this work are provided.
ID Code:95280
Collection:CaltechAUTHORS
Deposited By: Tony Diaz
Deposited On:07 May 2019 16:07
Last Modified:03 Oct 2019 21:11

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