Degree of mispricing with the black-scholes model and nonparametric cures
Annals of Economics and Finance, vol.4, no.1, pp.73-101, 2003 (Scopus)
- Publication Type: Article / Article
- Volume: 4 Issue: 1
- Publication Date: 2003
- Journal Name: Annals of Economics and Finance
- Journal Indexes: Scopus
- Page Numbers: pp.73-101
- Keywords: Bagging, Bayesian regularization, Early stopping, Feedforward networks, Nonparametric methods, Option pricing
- TED University Affiliated: No
Abstract
© 2003 by Peking University Press All rights of reproduction in any form reserved.The Black-Scholes pricing errors are larger in the deeper out-of-the-money options relative to the near out-of-the-money options, and mispricing worsens with increased volatility. Our results indicate that the Black-Scholes model is not the proper pricing tool in high volatility situations especially for very deep out-of-the-money options. Feedforward networks provide more accurate pricing estimates for the deeper out-of-the money options and handles pricing during high volatility with considerably lower errors for out-of-the-money call and put options. This could be invaluable information for practitioners as option pricing is a major challenge during high volatility periods.