Bailey, Warren; Stulz, René M. - In: Journal of Financial and Quantitative Analysis 24 (1989) 01, pp. 1-12
This paper analyzes the pricing of stock index options in a simple general equilibrium model. In this model, the volatility of the stock index and the spot rate of interest are functions of a stochastic variable. The paper investigates the biases that arise when using the Black-Scholes model...