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
1287-1305
Mozumder, Sharif
fd0456fe-2db6-4ea2-bdf5-4f7c06761b24
Choudhry, Taufiq
6fc3ceb8-8103-4017-b3b5-2d38efa57728
Dempsey, Michael
ac5479d6-1337-4895-94b5-033420a23af2
April 2021
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), .
(doi:10.1007/s10614-020-10029-x).
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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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
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Date deposited: 28 Jun 2021 16:32
Last modified: 17 Mar 2024 02:51
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Author:
Sharif Mozumder
Author:
Michael Dempsey
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