ISSN:
1573-7144
Keywords:
index options
;
option pricing
;
dividend forecasting
Source:
Springer Online Journal Archives 1860-2000
Topics:
Economics
Notes:
Abstract Since the early days of option pricing theory,the assumption that the dividends on the underlying stock orindex over the life of the contract are known has not been challenged.We examine the sensitivity of index option prices to the assumptionof dividend uncertainty. We consider a number of issues relatedto the forecasting of dividends and build a dividend forecastingmodel that passes several rigorous tests for unbiasedness. Wethen generate option prices using contemporary market levelsand interest rates. We find that prices generated with the actualdividends are unbiased with respect to those generated usingthe forecasted dividends. The magnitudes of the forecast errors,however, are sufficiently large to suggest a concern, but thepercentage errors are consistently small, typically amountingto less than two percent of the option price. We conclude thatthe convenient assumption that the stream of future dividendsis known is probably innocuous.
Type of Medium:
Electronic Resource
URL:
http://dx.doi.org/10.1023/A:1011335530815
Permalink
