scholarly journals Comparing Two Different Option Pricing Methods

Risks ◽  
2020 ◽  
Vol 8 (4) ◽  
pp. 108
Author(s):  
Alessandro Bondi ◽  
Dragana Radojičić ◽  
Thorsten Rheinländer
Keyword(s):  
Option Pricing ◽  
Financial Markets ◽  
Stock Exchange ◽  
Calibration Method ◽  
Call Option ◽  
Option Prices ◽  
Penalty Term ◽  
Pricing Options ◽  
Percentage Difference ◽  
Using Data

Motivated by new financial markets where there is no canonical choice of a risk-neutral measure, we compared two different methods for pricing options: calibration with an entropic penalty term and valuation by the Esscher measure. The main aim of this paper is to contrast the outcomes of those two methods with real-traded call option prices in a liquid market like NASDAQ stock exchange, using data referring to the period 2019–2020. Although the Esscher measure method slightly underperforms the calibration method in terms of absolute values of the percentage difference between real and model prices, it could be the only feasible choice if there are not many liquidly traded derivatives in the market.

scholarly journals Markov Chain Monte Carlo Method for Estimating Implied Volatility in Option Pricing

2018 ◽  
Vol 10 (6) ◽  
pp. 108
Author(s):  
Yao Elikem Ayekple ◽  
Charles Kofi Tetteh ◽  
Prince Kwaku Fefemwole
Keyword(s):  
Option Pricing ◽  
Implied Volatility ◽  
Call Option ◽  
Option Prices ◽  
Options Market ◽  
European Call Option ◽  
Black Scholes Model ◽  
Black Scholes ◽  
Real Market ◽  
Independent Path

Using market covered European call option prices, the Independence Metropolis-Hastings Sampler algorithm for estimating Implied volatility in option pricing was proposed. This algorithm has an acceptance criteria which facilitate accurate approximation of this volatility from an independent path in the Black Scholes Model, from a set of finite data observation from the stock market. Assuming the underlying asset indeed follow the geometric brownian motion, inverted version of the Black Scholes model was used to approximate this Implied Volatility which was not directly seen in the real market: for which the BS model assumes the volatility to be a constant. Moreover, it is demonstrated that, the Implied Volatility from the options market tends to overstate or understate the actual expectation of the market. In addition, a 3-month market Covered European call option data, from 30 different stock companies was acquired from Optionistic.Com, which was used to estimate the Implied volatility. This accurately approximate the actual expectation of the market with low standard errors ranging between 0.0035 to 0.0275.

Pricing options on a mean-reverting asset by the analytical operator splitting method

2021 ◽  
pp. 2150002
Author(s):  
C. F. Lo ◽  
Y. W. He
Keyword(s):  
Operator Splitting ◽  
Splitting Method ◽  
Dynamical Symmetry ◽  
Call Option ◽  
Option Prices ◽  
Pricing Options ◽  
Operator Splitting Method ◽  
European Call Option ◽  
Price Formula ◽  
Black Scholes

In this paper, we propose an operator splitting method to valuate options on the inhomogeneous geometric Brownian motion. By exploiting the approximate dynamical symmetry of the pricing equation, we derive a simple closed-form approximate price formula for a European call option which resembles closely the Black–Scholes price formula for a European vanilla call option. Numerical tests show that the proposed method is able to provide very accurate estimates and tight bounds of the exact option prices. The method is very efficient and robust as well.

scholarly journals Option Pricing by Probability Distortion Operator Based on the Quantile Function

2019 ◽  
Vol 2019 ◽  
pp. 1-9
Author(s):  
Luogen Yao ◽  
Gang Yang
Keyword(s):  
Option Pricing ◽  
Simulation Analysis ◽  
Quantile Function ◽  
Martingale Measure ◽  
Option Prices ◽  
New Class ◽  
Pricing Options ◽  
Black Scholes ◽  
Exponential Lévy Models

A new class of distortion operators based on quantile function is proposed for pricing options. It is shown that option prices obtained with our distortion operators are just the prices under mean correcting martingale measure in exponential Lévy models. In particular, Black-Scholes formula can be recuperated by our distortion operator. Simulation analysis shows that our distortion operator is superior to normal distortion operator and NIG distortion operator.

scholarly journals Option pricing in Heston model by means of weak approximations

2013 ◽  
Vol 54 ◽  
Author(s):  
Antanas Lenkšas ◽  
Vigirdas Mackevičius
Keyword(s):  
Option Pricing ◽  
Heston Model ◽  
Call Option ◽  
Option Prices ◽  
Weak Approximations

We apply weak split-step approximations of the Heston model for evaluation of put and call option prices in this model.

Uncertain Stochastic Option Pricing in the Presence of Uncertain Jumps

2019 ◽  
Vol 27 (04) ◽  
pp. 613-635
Author(s):  
Justin Chirima ◽  
Eriyoti Chikodza ◽  
Senelani Dorothy Hove-Musekwa
Keyword(s):  
Differential Equation ◽  
Differential Equations ◽  
Option Pricing ◽  
Stock Price ◽  
Call Option ◽  
Option Prices ◽  
Jump Size ◽  
Canonical Process ◽  
Option Pricing Model ◽  
Pricing Formula

In this paper, a new differential equation, driven by aleatory and epistemic forms of uncertainty, is introduced and applied to describe the dynamics of a stock price process. This novel class of differential equations is called uncertain stochastic differential equations(USDES) with uncertain jumps. The existence and uniqueness theorem for this class of differential equations is proposed and proved. An appropriate version of the chain rule is derived and applied to solve some examples of USDES with uncertain jumps. The differential equation discussed is applied in an American call option pricing problem. In this problem, it is assumed that the evolution of the stock price is driven by a Brownian motion, the Liu canonical process and an uncertain renewal process. MATLAB is employed for implementing the derived option pricing model. Results show that option prices from the proposed call option pricing formula increase as the jump size increases. As compared to the proposed call option pricing formula, the Black-Scholes overprices options for a certain range of strike prices and under-prices the same options for another range of exercise prices when the jump size is zero.

scholarly journals Option Pricing Under GARCH Models Applied to the SET50 Index of Thailand

2021 ◽  
Vol 20 ◽  
pp. 112-121
Author(s):  
Somphorn Arunsingkarat ◽  
Renato Costa ◽  
Masnita Misran ◽  
Nattakorn Phewchean
Keyword(s):  
Historical Data ◽  
Stock Exchange ◽  
Garch Models ◽  
Option Prices ◽  
Pricing Options ◽  
Black Scholes Model ◽  
Stock Exchange Of Thailand ◽  
Black Scholes ◽  
Neutral Models ◽  
Changes Over Time

Variance changes over time and depends on historical data and previous variances; as a result, it is useful to use a GARCH process to model it. In this paper, we use the notion of Conditional Esscher transform to GARCH models to find the GARCH, EGARCH and GJR risk-neutral models. Subsequently, we apply these three models to obtain option prices for the Stock Exchange of Thailand and compare to the well-known Black-Scholes model. Findings suggest that most of the pricing options under GARCH model are the nearest to the actual prices for SET50 option contracts with both times to maturity of 30 days and 60 days.

Momentum Effect in Stock Market: Empirical Evidence from Pakistan Stock Exchange

2019 ◽  
Vol 12 (1) ◽  
Author(s):  
Shahid Rasheed ◽  
Umar Saood ◽  
Waqar Alam
Keyword(s):  
Stock Market ◽  
Empirical Evidence ◽  
Stock Markets ◽  
Stock Exchange ◽  
Momentum Effect ◽  
Using Data

This study aims to examine the momentum effect presence in selected stocks of Pakistan stock market using data from Jan 2007 to Dec 2016. This study constructed the strategies includes docile, equal weighted and full rebalancing techniques. Data was extracted from the PSX – 100 index ranging from 2007 to 2016. STATA coding ASM software was used for calculating momentum portfolios, finally top 25 stocks were considered as a winner stocks and bottom 25 stocks were taken as a loser stocks. In conclusion, the results of the study found a strong momentum effect in Pakistan stock exchange PSX 100- index. As by results it has been observed that a substantial profit can earn by the investors or brokers in constructing a portfolio with a short formation period of three months and hold for 3, 6 and 12 months. There is hardly a study is present on the same topic on Pakistan Stock Exchange as preceding studies were only conducted on individual stock markets before merger of stock markets in Pakistan while this study leads the explanation of momentum phenomenon in new dimension i.e. Pakistan Stock Exchange. Keywords: Momentum, Portfolio, Winner Stocks, Loser Stocks

Absence of the weekend effect and industry-style portfolios

2019 ◽  
Vol 12 (4) ◽  
pp. 463-475
Author(s):  
Selma Izadi ◽  
Abdullah Noman
Keyword(s):  
New York ◽  
Stock Market ◽  
Structural Breaks ◽  
Stock Exchange ◽  
Structural Break ◽  
Weekend Effect ◽  
Content Type ◽  
Market Portfolio ◽  
The Us ◽  
Using Data

Purpose The existence of the weekend effect has been reported from the 1950s to 1970s in the US stock markets. Recently, Robins and Smith (2016, Critical Finance Review, 5: 417-424) have argued that the weekend effect has disappeared after 1975. Using data on the market portfolio, they document existence of structural break before 1975 and absence of any weekend effects after that date. The purpose of this study is to contribute some new empirical evidences on the weekend effect for the industry-style portfolios in the US stock market using data over 90 years. Design/methodology/approach The authors re-examine persistence or reversal of the weekend effect in the industry portfolios consisting of The New York Stock Exchange (NYSE), The American Stock Exchange (AMEX) and The National Association of Securities Dealers Automated Quotations exchange (NASDAQ) stocks using daily returns from 1926 to 2017. Our results confirm varying dates for structural breaks across industrial portfolios. Findings As for the existence of weekend effects, the authors get mixed results for different portfolios. However, the overall findings provide broad support for the absence of weekend effects in most of the industrial portfolios as reported in Robins and Smith (2016). In addition, structural breaks for other weekdays and days of the week effects for other days have also been documented in the paper. Originality/value As far as the authors are aware, this paper is the first research that analyzes weekend effect for the industry-style portfolios in the US stock market using data over 90 years.

scholarly journals Option Pricing Driven by a Telegraph Process with Random Jumps

2012 ◽  
Vol 49 (3) ◽  
pp. 838-849 ◽  
Author(s):  
Oscar López ◽  
Nikita Ratanov
Keyword(s):  
Option Pricing ◽  
Financial Market ◽  
Option Prices ◽  
Martingale Measures ◽  
Market Models ◽  
Telegraph Process ◽  
Equivalent Martingale Measures ◽  
Hedging Strategies ◽  
Random Jumps ◽  
Equivalent Martingale

In this paper we propose a class of financial market models which are based on telegraph processes with alternating tendencies and jumps. It is assumed that the jumps have random sizes and that they occur when the tendencies are switching. These models are typically incomplete, but the set of equivalent martingale measures can be described in detail. We provide additional suggestions which permit arbitrage-free option prices as well as hedging strategies to be obtained.

The relationship between knowledge-based economy and fraudulent financial reporting

2021 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Abbas Koolivand ◽  
Mahdi Salehi ◽  
Meysam Arabzadeh ◽  
Hassan Ghodrati
Keyword(s):  
Financial Markets ◽  
Financial Reporting ◽  
Fixed Effects ◽  
Stock Exchange ◽  
Fraudulent Financial Reporting ◽  
Content Type ◽  
Knowledge Based ◽  
Robust Testing ◽  
Knowledge Based Economy ◽  
The Relationship

Purpose This paper aims to assess the relationship between a knowledge-based economy and fraudulent financial reporting. Design/methodology/approach The study is descriptive-correlation based on published information from enlisted firms on the Tehran Stock Exchange during 2013–2019 with a sample of 178 firms (1,246 observations). The method used for hypothesis testing is linear regression using the panel data. Findings The results show that a knowledge-based economy is associated negatively and significantly with financial reporting. Moreover, robust testing has also examined the hypotheses (including fixed effects, OLS and t + 1) that confirmed the study’s preliminary results. Originality/value As the study was carried out in the emergent financial markets, like Iran, to figure out the relationship between knowledge-based economy and financial reporting, it can provide helpful information for the practitioners in this field.

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