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dc.contributor.authorIzhakian, Yehuda-
dc.contributor.authorAbudy, Menachem-
dc.description.abstractThis paper constructs a closed-form generalization of the Black-Scholes model for the case where the short-term interest rate follows a stochastic Gaussian process. Capturing this additional source of uncertainty appears to have a considerable effect on option prices. We show that the value of the stock option increases with the volatility of the interest rate and with time to maturity. Our empirical tests support the theoretical model and demonstrate a significant pricing improvement relative to the Black-Scholes model. The magnitude of the improvement is a positive function of the option's time to maturity, the largest improvement being obtained for around-the-money options.en
dc.rightsCopyright of Menachem Abudy and Yehuda Izhakian, 2011.en
dc.subjectcall optionen
dc.subjectput optionen
dc.subjectstochastic interest rateen
dc.subjectterm structure of interest ratesen
dc.subjectBlack and Scholesen
dc.subjectput-call parityen
dc.titlePricing Stock Options with Stochastic Interest Rateen
dc.typeWorking Paperen
Appears in Collections:Economics Working Papers

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