An application of the Black-Scholes-Merton (Osborne-Samuelson) Model to the Mexican Stock Exchange

• Published in: Aestimatio (Madrid) no. 8; p. 132
• Main Authors: Castañeda-Leyva, Netzahualcóyotl, Sáinz-Fernández, Manuel Delfino, Trejo-Pech, Carlos Omar
• Format: Journal Article
• Language: English
• Published: Madrid Instituto de Estudios Bursatiles 01.01.2014
• Subjects: Portfolio performance; Rates of return; Stock exchanges; Stock prices; Studies; Mexico
• ISSN: 2173-0164

This paper contributes to a better understanding of the Mexican Stock Exchange (MSE) through an empirical application of the Black-Scholes-Merton and Vasicek models, complementing the limited literature related to modeling prices and portfolios of Mexican stocks. The models are used to estimate return and volatility parameters of stocks and to optimize portfolios maximizing the power utility function. Inference of parameters is based on maximum likelihood estimation (MLE). Overall, our results show that risk and returns parameters are consistent with the risk-return theoretical framework. Results of optimal portfolios are also consistent with a hypothetical investor's rationale and risk profile. All estimated optimal portfolios outperform the Mexican Stock Exchange index (IPC) during the 2006-2010 period of study.