Comment on

1
Comment on A New Simple Square Root Option
Pricing Modelwritten by Camara and Wang

• San-Lin Chung
• Department of Finance
• National Taiwan University

2
Summary of the paper

• This paper derives a new option pricing model
  under the general equilibrium framework. The new
  option pricing formulae are attractive because
  (1) they are simple, (2) are preference free, and
  (3) can generate negative skewed implied
  volatility curve.

3
Main contributions of the paper

• Provide a new option pricing model based on a
  general equilibrium framework.

4
Suggestions and Comments

• Given the fact that there are already a lot of
  option pricing models in the literature, the
  authors should give stronger motivations for
  providing another option pricing model. Why
  bother to provide another option model which can
  generate negative skewed implied volatility?
• In this paper, the aggregate wealth follows
  displaced lognormal distribution and the
  individual stock price follows the square root
  distribution. It is difficult to understand why
  they follow totally different probability
  distributions.

5
Suggestions and Comments

• One potential problem is that the proposed model
  can not price options with strike prices smaller
  than alpha.

6
Suggestions and Comments

• I am curious about the asymptotic property of
  the proposed option pricing model when the
  volatility increases to infinity. In the BS
  model, the call price will converge to the
  underlying asset price when the volatility
  increases to infinity. It seems that the proposed
  model collapses when the volatility increases to
  infinity.

7
Suggestions and Comments

• In this paper, they compare the empirical
  performance of the proposed model with that of
  the BS model. I would suggest the authors to
  choose another benchmark model, such as CEV model
  and Mertons jump-diffusion model, because it is
  too easy to beat the BS model.