@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/v26y2022i5p1-14}, abstractNote={Purpose: The literature on option pricing is typically suitable to usual circumstances (normaleconomy). However, in general, under unusual economic states, the traditional models ofoptions are not suitable. Therefore, there is a need to consider alternative stochastic processesand models that captures the unusual states of the economy.
Design/methodology/approach: In this connection, we bridge the gap in the literature byproviding a simple, explicit pricing formula for the European option under both normal andabnormal economies.
Findings: In this paper, we first discuss the background theory for the Black-Scholes modelunder a normal economy when there are no unusual changes in the price of the underlying sothat Brownian motion works well. We then provide a simple, explicit pricing formula for theEuropean option under both normal and abnormal economies. This formula is as simple asthe classical Black-Scholes formula and there is no need for computational methods. In doingso, we utilize a nontraditional process (the square root of the Brownian motion) and complexanalysis. We also rely on a non-traditional stochastic process. Thereafter, we construct threeexamples to illustrate the use of our proposed model.
Originality/Value: Practical implications: The theory developed in this paper is used for investors for their investmentsand is useful for policy-makers in setting up some rules for the options markets.}, number={5}, journal={Advances in Decision Sciences}, author={Moawia Alghalith and Wong, Wing-Keung}, year={2023}, month={Jan.}, pages={1–14} }