The current world financial scene indicates at an intertwined and interdependent relationship
between financial market activity and economic health. This book explains how the economic
messages delivered by the dynamic evolution of financial asset returns are strongly related to
option prices. The Black Scholes framework is introduced and by underlining its shortcomings
an alternative approach is presented that has emerged over the past ten years of academic
research an approach that is much more grounded on a realistic statistical analysis of data
rather than on ad hoc tractable continuous time option pricing models. The reader then learns
what it takes to understand and implement these option pricing models based on time series
analysis in a self-contained way. The discussion covers modeling choices available to the
quantitative analyst as well as the tools to decide upon a particular model based on the
historical datasets of financial returns. The reader is then guided into numerical deduction of
option prices from these models and illustrations with real examples are used to reflect the
accuracy of the approach using datasets of options on equity indices.
