EJTP 4, No. 14 (2007) 69–86 Electronic Journal of Theoretical Physics A Generalized Option Pricing Model

Abstract: The Black Scholes model of option pricing constitutes the cornerstone of contemporary valuation theory. However, the model presupposes the existence of several unrealistic assumptions including the lognormal distribution of stock market price processes. There, now, subsists abundant empirical evidence that this is not the case. Consequently, several generalisations of the basic model have been attempted with relaxation of some of the underlying assumptions. In this paper, we postulate a generalization that contemplates a statistical feedback process for the stochastic term in the Black Scholes partial differential equation. Several interesting implications of this modification emanate from the analysis and are explored. c © Electronic Journal of Theoretical Physics. All rights reserved