A Generalized Model for Pricing Financial Derivatives Consistent with Efficient Markets Hypothesis—A Refinement of the Black-Scholes Model

This research article provides criticism and arguments why the canonical framework for derivatives pricing is incomplete delta-hedging approach not appropriate. An argument put forward, based on efficient market hypothesis, a proper risk-adjusted discount rate should enter into Black-Scholes model instead of risk-free rate. The resulting equation and, in particular, formula European call options then shown to depend explicitly drift underlying asset, which following geometric Brownian motion. It conjectured that with generalized model, predicted results by could be closer real data. adjusted partly also explain mystery volatility smile. present answers many finance professionals academics who have been intrigued risk-neutral features original framework. generally different fair values financial compared model. In predicts tends undervalue example options.