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Option pricing model biases: Bayesian and Markov chain Monte Carlo regression analysis

Option pricing model biases: Bayesian and Markov chain Monte Carlo regression analysis
Option pricing model biases: Bayesian and Markov chain Monte Carlo regression analysis

We investigate systematic and unsystematic option pricing biases in (a) pure jump Lévy, (b) jump-diffusion, (c) stochastic volatility, and (d) GARCH models applied to the Black–Scholes–Merton model. We use options data for trades on the S&P500 index from the CBOE. In addition to standard ordinary least square regression, we employ Bayesian regression and Markov Chain Monte Carlo regression to investigate the moneyness and maturity biases of the models. We demonstrate the usefulness of these advanced methodologies as compared to the benchmark techniques.

Bayesian regression, Fast Fourier transform, GARCH pricing, Lévy pricing, MCMC regression, Stochastic volatility pricing
0927-7099
1287-1305
Mozumder, Sharif
fd0456fe-2db6-4ea2-bdf5-4f7c06761b24
Choudhry, Taufiq
6fc3ceb8-8103-4017-b3b5-2d38efa57728
Dempsey, Michael
ac5479d6-1337-4895-94b5-033420a23af2
Mozumder, Sharif
fd0456fe-2db6-4ea2-bdf5-4f7c06761b24
Choudhry, Taufiq
6fc3ceb8-8103-4017-b3b5-2d38efa57728
Dempsey, Michael
ac5479d6-1337-4895-94b5-033420a23af2

Mozumder, Sharif, Choudhry, Taufiq and Dempsey, Michael (2021) Option pricing model biases: Bayesian and Markov chain Monte Carlo regression analysis. Computational Economics, 57 (4), 1287-1305. (doi:10.1007/s10614-020-10029-x).

Record type: Article

Abstract

We investigate systematic and unsystematic option pricing biases in (a) pure jump Lévy, (b) jump-diffusion, (c) stochastic volatility, and (d) GARCH models applied to the Black–Scholes–Merton model. We use options data for trades on the S&P500 index from the CBOE. In addition to standard ordinary least square regression, we employ Bayesian regression and Markov Chain Monte Carlo regression to investigate the moneyness and maturity biases of the models. We demonstrate the usefulness of these advanced methodologies as compared to the benchmark techniques.

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More information

Accepted/In Press date: 23 July 2020
e-pub ahead of print date: 23 July 2020
Published date: April 2021
Additional Information: Publisher Copyright: © 2020, Springer Science+Business Media, LLC, part of Springer Nature. Copyright: Copyright 2021 Elsevier B.V., All rights reserved.
Keywords: Bayesian regression, Fast Fourier transform, GARCH pricing, Lévy pricing, MCMC regression, Stochastic volatility pricing

Identifiers

Local EPrints ID: 449943
URI: http://eprints.soton.ac.uk/id/eprint/449943
ISSN: 0927-7099
PURE UUID: 7466da61-4a03-41d5-b163-5f4a87533d18
ORCID for Taufiq Choudhry: ORCID iD orcid.org/0000-0002-0463-0662

Catalogue record

Date deposited: 28 Jun 2021 16:32
Last modified: 28 Apr 2022 01:47

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Contributors

Author: Sharif Mozumder
Author: Taufiq Choudhry ORCID iD
Author: Michael Dempsey

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