The role of liquidity as an assumption in the Black and Scholes option pricing model
M.Com. (Finance and Investment Management) === The latest financial crisis that began in 2007 in the USA and spread to Europe, Africa and other continents has highlighted the importance of liquidity and its role in financial markets. One of the most commonly accepted mathematical models used in fina...
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ndltd-netd.ac.za-oai-union.ndltd.org-uj-uj-41232017-09-16T04:00:46ZThe role of liquidity as an assumption in the Black and Scholes option pricing modelSmyth, AnnetteCapital assets pricing modelLiquidity (Economics)AssumptionsBlack and Scholes ModelM.Com. (Finance and Investment Management)The latest financial crisis that began in 2007 in the USA and spread to Europe, Africa and other continents has highlighted the importance of liquidity and its role in financial markets. One of the most commonly accepted mathematical models used in financial markets is the Black and Scholes option pricing model (BSM model). The assumptions in the BSM model have again been questioned during the current crisis and, in particular, the assumption of an unending risk-free supply of liquidity. This report reviews this assumption in the South African financial markets with local market participants. These views are polled through the use of a questionnaire to gauge these participants' views on liquidity using proxies or factors that impact overall liquidity. The results showed significantly different perspectives depending on the role of the participant as either market maker or price taker. The overall liquidity proxies used showed that local market participants believe these proxies impact liquidity. The view that liquidity is an unending commodity and thus priced as riskless was disputed by local market participants. The practical significance of the research problem in the local context should provide local participants with some insight into local perceptions on liquidity that may provide some practical tools when pricing or trading instruments in the local market.2014-02-18Thesisuj:4123http://hdl.handle.net/10210/9470University of Johannesburg |
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Capital assets pricing model Liquidity (Economics) Assumptions Black and Scholes Model |
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Capital assets pricing model Liquidity (Economics) Assumptions Black and Scholes Model Smyth, Annette The role of liquidity as an assumption in the Black and Scholes option pricing model |
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M.Com. (Finance and Investment Management) === The latest financial crisis that began in 2007 in the USA and spread to Europe, Africa and other continents has highlighted the importance of liquidity and its role in financial markets. One of the most commonly accepted mathematical models used in financial markets is the Black and Scholes option pricing model (BSM model). The assumptions in the BSM model have again been questioned during the current crisis and, in particular, the assumption of an unending risk-free supply of liquidity. This report reviews this assumption in the South African financial markets with local market participants. These views are polled through the use of a questionnaire to gauge these participants' views on liquidity using proxies or factors that impact overall liquidity. The results showed significantly different perspectives depending on the role of the participant as either market maker or price taker. The overall liquidity proxies used showed that local market participants believe these proxies impact liquidity. The view that liquidity is an unending commodity and thus priced as riskless was disputed by local market participants. The practical significance of the research problem in the local context should provide local participants with some insight into local perceptions on liquidity that may provide some practical tools when pricing or trading instruments in the local market. |
author |
Smyth, Annette |
author_facet |
Smyth, Annette |
author_sort |
Smyth, Annette |
title |
The role of liquidity as an assumption in the Black and Scholes option pricing model |
title_short |
The role of liquidity as an assumption in the Black and Scholes option pricing model |
title_full |
The role of liquidity as an assumption in the Black and Scholes option pricing model |
title_fullStr |
The role of liquidity as an assumption in the Black and Scholes option pricing model |
title_full_unstemmed |
The role of liquidity as an assumption in the Black and Scholes option pricing model |
title_sort |
role of liquidity as an assumption in the black and scholes option pricing model |
publishDate |
2014 |
url |
http://hdl.handle.net/10210/9470 |
work_keys_str_mv |
AT smythannette theroleofliquidityasanassumptionintheblackandscholesoptionpricingmodel AT smythannette roleofliquidityasanassumptionintheblackandscholesoptionpricingmodel |
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