Black-Scholes versus artificial neural networks in pricing FTSE 100 options
Black-Scholes versus artificial neural networks in pricing FTSE 100 options
This paper compares the performance of Black-Scholes with an artificial neural network (ANN) in pricing European style call options on the FTSE 100 index. It is the first extensive study of the performance of ANNs in pricing UK options, and the first to allow for dividends in the closed-form model. For out-of-the-money options, the ANN is clearly superior to Black-Scholes. For in-the-money options, if the sample space is restricted by excluding deep in-the-money and long maturity options (3.4% of total volume), the performance of the ANN is comparable with that of Black-Scholes. The superiority of the ANN is a surprising result, given that European style equity options are the home ground of Black-Scholes, and suggests that ANNs may have an important role to play in pricing other options for which there is either no closed-form model, or the closed-form model is less successful than Black-Scholes for equity options.
University of Southampton
Sutcliffe, C.
95f94790-b30c-428a-b1d4-4fc9d1555dfe
Bennell, J.
38d924bc-c870-4641-9448-1ac8dd663a30
2000
Sutcliffe, C.
95f94790-b30c-428a-b1d4-4fc9d1555dfe
Bennell, J.
38d924bc-c870-4641-9448-1ac8dd663a30
Sutcliffe, C. and Bennell, J.
(2000)
Black-Scholes versus artificial neural networks in pricing FTSE 100 options
(Discussion Papers in Accounting and Management Science, 00-156)
Southampton, UK.
University of Southampton
23pp.
Record type:
Monograph
(Working Paper)
Abstract
This paper compares the performance of Black-Scholes with an artificial neural network (ANN) in pricing European style call options on the FTSE 100 index. It is the first extensive study of the performance of ANNs in pricing UK options, and the first to allow for dividends in the closed-form model. For out-of-the-money options, the ANN is clearly superior to Black-Scholes. For in-the-money options, if the sample space is restricted by excluding deep in-the-money and long maturity options (3.4% of total volume), the performance of the ANN is comparable with that of Black-Scholes. The superiority of the ANN is a surprising result, given that European style equity options are the home ground of Black-Scholes, and suggests that ANNs may have an important role to play in pricing other options for which there is either no closed-form model, or the closed-form model is less successful than Black-Scholes for equity options.
Text
00-156
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Published date: 2000
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Local EPrints ID: 35650
URI: http://eprints.soton.ac.uk/id/eprint/35650
ISSN: 1356-3548
PURE UUID: c4c3b21b-3634-4eb9-b517-f0ad854f3c0c
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Date deposited: 26 Jul 2006
Last modified: 23 May 2024 16:45
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Author:
C. Sutcliffe
Author:
J. Bennell
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