@article{Moawia Alghalith_Wong_2023, title={Option Pricing Under an Abnormal Economy: using the Square Root of the Brownian Motion}, volume={26}, url={https://journal.asia.edu.tw/index.php/ADS/article/view/214}, DOI={10.47654/v26y2022i5p14}, abstractNote={<p><strong>Purpose:</strong> The literature on option pricing is typically suitable to usual circumstances (normal<br />economy). However, in general, under unusual economic states, the traditional models of<br />options are not suitable. Therefore, there is a need to consider alternative stochastic processes<br />and models that captures the unusual states of the economy.</p>
<p><strong>Design/methodology/approach:</strong> In this connection, we bridge the gap in the literature by<br />providing a simple, explicit pricing formula for the European option under both normal and<br />abnormal economies.</p>
<p><strong>Findings:</strong> In this paper, we first discuss the background theory for the Black-Scholes model<br />under a normal economy when there are no unusual changes in the price of the underlying so<br />that Brownian motion works well. We then provide a simple, explicit pricing formula for the<br />European option under both normal and abnormal economies. This formula is as simple as<br />the classical Black-Scholes formula and there is no need for computational methods. In doing<br />so, we utilize a nontraditional process (the square root of the Brownian motion) and complex<br />analysis. We also rely on a non-traditional stochastic process. Thereafter, we construct three<br />examples to illustrate the use of our proposed model.</p>
<p><strong>Originality/Value: </strong>Practical implications: The theory developed in this paper is used for investors for their investments<br />and is useful for policy-makers in setting up some rules for the options markets.</p>}, number={5}, journal={Advances in Decision Sciences}, author={Moawia Alghalith and Wong, Wing-Keung}, year={2023}, month={Jan.}, pages={14} }