Option Valuation in Changing Markets
(2013) NEKN01 20131Department of Economics
- Abstract (Swedish)
- Theoretical option prices can be computed using several different pricing models which make numerous assumptions about the markets and the underlying asset. Depending on those assumptions, the models have different strengths and weaknesses which make them more suited to a specific type of market.
This study evaluates six different pricing models implemented in MATLAB, and introduces a combined model which is a linear combination of two of the implemented models. They are dynamically combined by an exogenous framework utilizing estimated market volatility to blend the models and minimize the model price error. This combined model is empirically tested using European call options with the DAX and the FTSE indices as the underlying assets.... (More) - Theoretical option prices can be computed using several different pricing models which make numerous assumptions about the markets and the underlying asset. Depending on those assumptions, the models have different strengths and weaknesses which make them more suited to a specific type of market.
This study evaluates six different pricing models implemented in MATLAB, and introduces a combined model which is a linear combination of two of the implemented models. They are dynamically combined by an exogenous framework utilizing estimated market volatility to blend the models and minimize the model price error. This combined model is empirically tested using European call options with the DAX and the FTSE indices as the underlying assets. For both indices, the price error is significantly smaller in the combined model than in any of the six standard models. (Less)
Please use this url to cite or link to this publication:
http://lup.lub.lu.se/student-papers/record/3803952
- author
- Melin, Andreas LU
- supervisor
- organization
- course
- NEKN01 20131
- year
- 2013
- type
- H1 - Master's Degree (One Year)
- subject
- keywords
- Option pricing, combined pricing model, pricing models, finite differences, numerical methods
- language
- English
- id
- 3803952
- date added to LUP
- 2013-06-20 10:47:43
- date last changed
- 2013-06-20 10:47:43
@misc{3803952, abstract = {{Theoretical option prices can be computed using several different pricing models which make numerous assumptions about the markets and the underlying asset. Depending on those assumptions, the models have different strengths and weaknesses which make them more suited to a specific type of market. This study evaluates six different pricing models implemented in MATLAB, and introduces a combined model which is a linear combination of two of the implemented models. They are dynamically combined by an exogenous framework utilizing estimated market volatility to blend the models and minimize the model price error. This combined model is empirically tested using European call options with the DAX and the FTSE indices as the underlying assets. For both indices, the price error is significantly smaller in the combined model than in any of the six standard models.}}, author = {{Melin, Andreas}}, language = {{eng}}, note = {{Student Paper}}, title = {{Option Valuation in Changing Markets}}, year = {{2013}}, }