Degree of mispricing with the black-scholes model and nonparametric cures
Date
2003
Authors
Gençay, R.
Salih, A.
Editor(s)
Advisor
Supervisor
Co-Advisor
Co-Supervisor
Instructor
Source Title
Economics and Finance. Annals
Print ISSN
1529-7373
Electronic ISSN
Publisher
Peking University Press
Volume
4
Issue
Pages
73 - 101
Language
English
Type
Journal Title
Journal ISSN
Volume Title
Series
Abstract
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.