Journal of Applied Finance & Banking

Mean-Reverting-Ebit-Based Stock Option Evaluation: Theory and Practice

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  • Abstract

    This paper examines the derivation of a capital-structure EBIT-based call option expression with the El Ibrami and Naciri [2012] equity value as the underlying asset. The modelís PDE and ODE are similar to Black-Scholes but have widely different and non-constant coefficients. An empirical analysis of the new model is conducted to measure its performance, using the last close price of the evaluated stock options and the Black-Scholes values as benchmarks. The results show that the authorís model is robust, whereas the Black-Scholes model overestimates the stock options.