Download or read book A Horse Race Among Competing Option Pricing Models Using S P 500 Index Options written by Minqiang Li and published by . This book was released on 2008 with total page 34 pages. Available in PDF, EPUB and Kindle. Book excerpt: The last three decades have witnessed a whole array of option pricing models. We compare the predictive performances of a selection of models by carrying out a horse race on Samp;P 500 index options along the lines of Jackwerth and Rubinstein (2001). The models we consider include: Black-Scholes, trader rules, Heston's stochastic volatility model, Merton's jump diffusion models with and without stochastic volatility, and more recent Levy type models. Trader rules still dominate mathematically more sophisticated models, and the performance of the trader rules is further improved by incorporating the stable index skew pattern documented in Li and Pearson (2005). Furthermore, after incorporating the stable index skew pattern, the Black-Scholes model beats all mathematically more sophisticated models in almost all cases. Mathematically more sophisticated models vary in their overall performance and their relative accuracy in forecasting future volatility levels and future volatility skew shapes.

Download or read book Derivatives Pricing and Modeling written by Jonathan Batten and published by Emerald Group Publishing. This book was released on 2012-07-02 with total page 446 pages. Available in PDF, EPUB and Kindle. Book excerpt: Highlights research in derivatives modelling and markets in a post-crisis world across a number of dimensions or themes. This book addresses the following main areas: derivatives models and pricing, model application and performance backtesting, and new products and market features.

Download or read book Positional Option Trading written by Euan Sinclair and published by John Wiley & Sons. This book was released on 2020-09-01 with total page 246 pages. Available in PDF, EPUB and Kindle. Book excerpt: A detailed, one-stop guide for experienced options traders Positional Option Trading: An Advanced Guide is a rigorous, professional-level guide on sophisticated techniques from professional trader and quantitative analyst Euan Sinclair. The author has over two decades of high-level option trading experience. He has written this book specifically for professional options traders who have outgrown more basic trading techniques and are searching for in-depth information suitable for advanced trading. Custom-tailored to respond to the volatile option trading environment, this expert guide stresses the importance of finding a valid edge in situations where risk is usually overwhelmed by uncertainty and unknowability. Using examples of edges such as the volatility premium, term-structure premia and earnings effects, the author shows how to find valid trading ideas and details the decision process for choosing an option structure that best exploits the advantage. Advanced topics include a quantitative approach for directionally trading options, the robustness of the Black Scholes Merton model, trade sizing for option portfolios, robust risk management and more. This book: Provides advanced trading techniques for experienced professional traders Addresses the need for in-depth, quantitative information that more general, intro-level options trading books do not provide Helps readers to master their craft and improve their performance Includes advanced risk management methods in option trading No matter the market conditions, Positional Option Trading: An Advanced Guide is an important resource for any professional or advanced options trader.

Download or read book Pricing S P 500 Index Options Using a Hilbert Space Basis written by Peter Albert Abken and published by . This book was released on 1996 with total page 58 pages. Available in PDF, EPUB and Kindle. Book excerpt:

Download or read book Are Classical Option Pricing Models Consistent with Observed Option Second Order Moments Evidence from High Frequency Data written by Francesco Audrino and published by . This book was released on 2015 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: As a means of validating an option pricing model, we compare the ex-post intra-day realized variance of options with the realized variance of the associated underlying asset that would be implied using assumptions as in the Black and Scholes (BS) model, the Heston and the Bates model. Based on data for the S&P 500 index, we find that the BS model is strongly directionally biased due to the presence of stochastic volatility. The Heston model reduces the mismatch in realized variance between the two markets, but deviations are still significant. With the exception of short-dated options, we achieve best approximations after controlling for the presence of jumps in the underlying dynamics. Finally, we provide evidence that, although heavily biased, the realized variance based on the BS model contains relevant predictive information that can be exploited when option high-frequency data is not available.

Download or read book The Shifted Log normal Model and Option Pricing Models of the S P500 Index written by Visakha Thongphetsavong and published by . This book was released on 2012 with total page 146 pages. Available in PDF, EPUB and Kindle. Book excerpt:

Download or read book Empirical Performance of Option Pricing Models with Stochastic Local Volatility written by Greg Orosi and published by . This book was released on 2014 with total page 16 pages. Available in PDF, EPUB and Kindle. Book excerpt: We examine the empirical performance of several stochastic local volatility models that are the extensions of the Heston stochastic volatility model. Our results indicate that the stochastic volatility model with quadratic local volatility significantly outperforms the stochastic volatility model with CEV type local volatility. Moreover, we compare the performance of these models to several other benchmarks and find that the quadratic local volatility model compares well to the best performing option pricing models reported in the current literature for European-style S&P500 index options. Our results also indicate that the model with quadratic local volatility reproduces the characteristics of the implied volatility surface more accurately than the Heston model. Finally, we demonstrate that capturing the shape of the implied volatility surface is necessary to price binary options accurately.

Download or read book An Empirical Test of the Black Scholes and Merton Option Pricing Model Against Competing Models Incorporating Various Non constant Volatility Processes Applied to Equity Index Options written by Joshua Matthew Garwood and published by . This book was released on 2007 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt:

Download or read book A Test of Efficiency for the S P 500 Index Option Market Using Variance Forecasts written by Jaesun Noh and published by . This book was released on 1993 with total page 48 pages. Available in PDF, EPUB and Kindle. Book excerpt: To forecast future option prices, autoregressive models of implied volatility derived from observed option prices are commonly employed [see Day and Lewis (1990), and Harvey and Whaley (1992)]. In contrast, the ARCH model proposed by Engle (1982) models the dynamic behavior in volatility, forecasting future volatility using only the return series of an asset. We assess the performance of these two volatility prediction models from S&P 500 index options market data over the period from September 1986 to December 1991 by employing two agents who trade straddles, each using one of the two different methods of forecast. Straddle trading is employed since a straddle does not need to be hedged. Each agent prices options according to her chosen method of forecast, buying (selling) straddles when her forecast price for tomorrow is higher (lower) than today's market closing price, and at the end of each day the rates of return are computed. We find that the agent using the GARCH forecast method earns greater profit than the agent who uses the implied volatility regression (IVR) forecast model. In particular, the agent using the GARCH forecast method earns a profit in excess of a cost of $0.25 per straddle with the near-the-money straddle trading.

Download or read book Pricing S P 500 Index Put Options written by Robert L. Geske and published by . This book was released on 2010 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: The primary purpose of this paper is to examine whether leverage has a significant statistical and economic effect on the pricing of Samp;P 500 index put options. The secondary purpose is to present information regarding the shape and persistent smile rather than skew of the implied volatility function. This is the first paper to directly test for leverage effects in stock index put options. To analyze these effects we use the Geske (1979) compound option model. The Geske model is closed form, implies stochastic equity volatility, is consistent with Modigliani and Miller, incorporates debt refinancing, and includes possibly differential default and bankruptcy. Black-Scholes (1973) is a special case of the Geske model. In this paper we show that during the years 1996-2004 the aggregate market based debt to equity (D/E) ratio of the firms comprising the Samp;P 500 equity index varies from about 40-120 percent. We believe that we are the first to present a market D/E ratio derived from option theory. We also present evidence that on an average of about 200,000 options during this 8 year period the implied volatility most often exhibits a smile not a smirk or skew. Next and more importantly we are the first to report the details of the statistically significant economic effects that market leverage has on pricing Samp;P 500 index put options. We measure that the Geske model improves the net option valuation of listed in the money (or out of the money) Samp;P 500 index put options on average by about 37% (19%) compared to Black-Scholes values. We demonstrate that the improvement is directly (and monotonically) related to both the time to expiration of the option and the amount of leverage in this market index. For options with longer expirations and/or periods of higher market leverage the improvement is greater, ranging from about 50% to 85%. We also demonstrate economic significance in basis points by showing that dealers making a book in index options can expect benefits of at least several 100 basis points using Geske instead of Black-Scholes. Finally we show that the per cent pricing errors compare very favorably with Heston-Nandi (2000).

Download or read book Option Pricing with Model Guided Nonparametric Methods written by Jianqing Fan and published by . This book was released on 2009 with total page 55 pages. Available in PDF, EPUB and Kindle. Book excerpt: Parametric option pricing models are largely used in Finance. These models capture several features of asset price dynamics. However, their pricing performance can be significantly enhanced when they are combined with nonparametric learning approaches that learn and correct empirically the pricing errors. In this paper, we propose a new nonparametric method for pricing derivatives assets. Our method relies on the state price distribution instead of the state price density because the former is easier to estimate nonparametrically than the latter. A parametric model is used as an initial estimate of the state price distribution. Then the pricing errors induced by the parametric model are fitted nonparametrically. This model-guided method estimates the state price distribution nonparametrically and is called Automatic Correction of Errors (ACE). The method is easy to implement and can be combined with any model-based pricing formula to correct the systematic biases of pricing errors. We also develop a nonparametric test based on the generalized likelihood ratio to document the efficacy of the ACE method. Empirical studies based on Samp;P 500 index options show that our method outperforms several competing pricing models in terms of predictive and hedging abilities.

Download or read book A Time Series Approach to Option Pricing written by Christophe Chorro and published by Springer. This book was released on 2014-12-18 with total page 0 pages. Available in PDF, EPUB and Kindle. Book excerpt: The current world financial scene indicates at an intertwined and interdependent relationship between financial market activity and economic health. This book explains how the economic messages delivered by the dynamic evolution of financial asset returns are strongly related to option prices. The Black Scholes framework is introduced and by underlining its shortcomings, an alternative approach is presented that has emerged over the past ten years of academic research, an approach that is much more grounded on a realistic statistical analysis of data rather than on ad hoc tractable continuous time option pricing models. The reader then learns what it takes to understand and implement these option pricing models based on time series analysis in a self-contained way. The discussion covers modeling choices available to the quantitative analyst, as well as the tools to decide upon a particular model based on the historical datasets of financial returns. The reader is then guided into numerical deduction of option prices from these models and illustrations with real examples are used to reflect the accuracy of the approach using datasets of options on equity indices.

Download or read book The Effects of Leverage on the Pricing S P 500 Index Call Options written by Robert L. Geske and published by . This book was released on 2009 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: The purpose of this paper is to examine whether leverage has a significant statistical and economic effect on the pricing of Samp;P 500 index options. This is the first paper to directly test for leverage effects in stock index options. To analyze these effects we use the Geske (1979) compound option model. The Geske model is closed form, implies stochastic equity volatility, is consistent with Modigliani and Miller, incorporates debt refinancing, and includes possibly differential default and bankruptcy. Black-Scholes (1973) is a special case of the Geske model. In this paper we show that during the years 1996-2004 the aggregate market based debt to equity (D/E) ratio of the firms comprising the Samp;P 500 equity index varies from about 40-120 percent. We believe this is the first presentation of a market D/E ratio derived from option theory. Next and more importantly we are the first to report the details of the statistically significant economic effects that market leverage has on pricing Samp;P 500 index call options. We measure that the Geske model improves the net option valuation of listed in the money (or out of the money) Samp;P 500 index call options on average by about 35% (28%) compared to Black-Scholes values. We demonstrate that the improvement is directly (and monotonically) related to both the time to expiration of the option and the amount of leverage in this market index. For options with longer expirations and/or periods of higher market leverage the improvement is greater, ranging from about 40% to 80%. We also demonstrate economic significance in basis points by showing that dealers making a book in index options can expect benefits of at least several 100 basis points using Geske instead of Black-Scholes.

Download or read book Option Pricing in the Real World written by Tom Arnold and published by . This book was released on 2000 with total page 54 pages. Available in PDF, EPUB and Kindle. Book excerpt: We extend a popular binomial model to allow for option pricing using real-world rather than risk-neutral world probabilities. There are three benefits. First, our model allows direct inference about relevant real-world probabilities (e.g. of success in a real-option project, of default on a corporate bond, or of an American-style option finishing in the money). Second, practitioners using our model for corporate real-option applications completely avoid managerial anxiety that competing risk-neutral models generate when they use risk-free discount rates for risky cash flows. Third, our model simplifies option pricing when higher moments (e.g., skewness and kurtosis) appear in asset pricing models.

Download or read book Smarter Than the Options Market A Real Measure GARCH Option Pricing Model with Volatility Regime Simulation written by Chrilly Donninger and published by . This book was released on 2014 with total page 14 pages. Available in PDF, EPUB and Kindle. Book excerpt: This working paper uses as a starting point the filtered historical simulation (FHS) approach developed by Barone-Adesi et al. One builds a GRJ-GARCH model and generates Monte-Carlo return/price paths with normalized returns. This introduces a severe drift-bias. The Volatility Regime Simulation (VRS) avoids the bias by sampling from the same volatility regime.Barone-Adesi et al. transform the real-world into the risk-neutral measure. They calibrate the GARCH model to the market prices of plain-vanilla options.The current model stays in the real-measure. One simulates a realistic trading behavior by hedging the options along the Monte-Carlo paths. The model generates the stylized facts of S&P-500 index options. The overall agreement with market-prices is quite good. According the model Calls are somewhat under-, Puts are somewhat overpriced. The second part of the paper demonstrates the promising application of the model for index options trading.

Download or read book A GARCH Option Pricing Model with Filtered Historical Simulation written by Giovanni Barone-Adesi and published by . This book was released on 2010 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: We propose a new method for pricing options based on GARCH models with filtered historical innovations. In an incomplete market framework, we allow for different distributions of historical and pricing return dynamics, which enhances the model's flexibility to fit market option prices. An extensive empirical analysis based on Samp;P 500 index options shows that our model outperforms other competing GARCH pricing models and ad hoc Black-Scholes models. We show that the flexible change of measure, the asymmetric GARCH volatility, and the nonparametric innovation distribution induce the accurate pricing performance of our model. Using a nonparametric approach, we obtain decreasing state-price densities per unit probability as suggested by economic theory and corroborating our GARCH pricing model. Implied volatility smiles appear to be explained by asymmetric volatility and negative skewness of filtered historical innovations.

Download or read book The Efficient Market Theory and Evidence written by Andrew Ang and published by Now Publishers Inc. This book was released on 2011 with total page 99 pages. Available in PDF, EPUB and Kindle. Book excerpt: The Efficient Market Hypothesis (EMH) asserts that, at all times, the price of a security reflects all available information about its fundamental value. The implication of the EMH for investors is that, to the extent that speculative trading is costly, speculation must be a loser's game. Hence, under the EMH, a passive strategy is bound eventually to beat a strategy that uses active management, where active management is characterized as trading that seeks to exploit mispriced assets relative to a risk-adjusted benchmark. The EMH has been refined over the past several decades to reflect the realism of the marketplace, including costly information, transactions costs, financing, agency costs, and other real-world frictions. The most recent expressions of the EMH thus allow a role for arbitrageurs in the market who may profit from their comparative advantages. These advantages may include specialized knowledge, lower trading costs, low management fees or agency costs, and a financing structure that allows the arbitrageur to undertake trades with long verification periods. The actions of these arbitrageurs cause liquid securities markets to be generally fairly efficient with respect to information, despite some notable anomalies.