Tests of Two Models for Valuing Call Options on Stocks with Dividends

Authors

  • WILLIAM STERK

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    • Assistant Professor of Finance, San Diego State University. This research was supported in part by the San Diego State University Foundation. Helpful comments and suggestions by M. Brennan, L. Gitman, K. Sachdeva, and Mark Rubinstein are gratefully acknowledged. In addition, I would like to thank K. Fredrickson for extensive assistance with this research.

ABSTRACT

Roll has recently formulated an option pricing model which allows dividend payments on the underlying stock. This paper compares the performance of the exact Roll model with a modified, but inexact, Black-Scholes model. The results indicate that the Roll model prices are significantly closer to actual market prices.

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