Question: Discuss the empirical evidence that suggests that the assumption that the S&P 500 index follows a Geometric Brownian Motion is rejected. Provide at least two
Discuss the empirical evidence that suggests that the assumption that the S&P 500 index follows a Geometric Brownian Motion is rejected. Provide at least two stylised empirical facts using daily returns of the index. For each of the stylised facts, discuss whether you expect out-of-the money put option prices to increase or decrease (compared with the Geometric Brownian Motion assumption) and why.
Step by Step Solution
There are 3 Steps involved in it
The assumption that the SP 500 index follows a Geometric Brownian Motion GBM is a simplification used in financial modelingbut it doesnt perfectly cap... View full answer
Get step-by-step solutions from verified subject matter experts
