An Empirical Study Of Warrant Pricing With Stochastic Volatilities

The volatility of stock price is a decisive factor in derivatives pricing. Black and Scholes put forward for European option a price formula, in which stock price is subject to Geometry Brownian movement in a non-arbitrage analysis framework. But more and more empirical study has revealed that stock returns, which have a peaky and fat-tail phenomenon, are very difficult to be described with the general normal distribution. Moreover, the volatility shows an obvious feature of time varying. Therefore, the research of a more flexible condition for and the varying characteristics of the volatility of stock prices would be very significant for the proper pricing of warrant.Through analysis, this thesis finds that the feature of Baogang stock returns is an apparent time varying, jumping and non-normal distribution. Therefore, the Baogang warrant could not be priced by Black and Scholes' formula because its features do not meet the conditions of the formula. This thesis will use Stochastic Volatilities model to analyze Baogang stock returns and use the risk-neutral pricing principle to price Baogang warrant theoretically. Compared with theoretical pricing under history volatilities, the theoretic price made with the model of Stochastic Volatilities is favorable. Based on...