A neural network versus Black-Scholes: A comparison of pricing and hedging performances
(2003) In Journal of Forecasting 22(4). p.317-335- Abstract
- The Black-Scholes formula is a well-known model for pricing and hedging derivative securities. It relies, however, on several highly questionable assumptions. This paper examines whether a neural network (MLP) can be used to find a call option pricing formula better corresponding to market prices and the properties of the underlying asset than the Black-Scholes formula' The neural network method is applied to the out-of-sample pricing and delta-hedging of daily Swedish stock index call options from 1997 to 1999. The relevance of a hedge-analysis is stressed further in this paper. As benchmarks, the Black-Scholes model with historical and implied volatility estimates are used. Comparisons reveal that the neural network models outperform the... (More)
- The Black-Scholes formula is a well-known model for pricing and hedging derivative securities. It relies, however, on several highly questionable assumptions. This paper examines whether a neural network (MLP) can be used to find a call option pricing formula better corresponding to market prices and the properties of the underlying asset than the Black-Scholes formula' The neural network method is applied to the out-of-sample pricing and delta-hedging of daily Swedish stock index call options from 1997 to 1999. The relevance of a hedge-analysis is stressed further in this paper. As benchmarks, the Black-Scholes model with historical and implied volatility estimates are used. Comparisons reveal that the neural network models outperform the benchmarks both in pricing and hedging performances. A moving block bootstrap is used to test the statistical significance of the results. Although the neural networks are superior, the results are sometimes insignificant at the 5% level. Copyright (C) 2003 John Wiley Sons, Ltd. (Less)
Please use this url to cite or link to this publication:
https://lup.lub.lu.se/record/900075
- author
- Amilon, Henrik LU
- organization
- publishing date
- 2003
- type
- Contribution to journal
- publication status
- published
- subject
- keywords
- neural networks, option pricing, hedging, bootstrap, inference, statistical
- in
- Journal of Forecasting
- volume
- 22
- issue
- 4
- pages
- 317 - 335
- publisher
- John Wiley & Sons Inc.
- external identifiers
-
- wos:000184482200003
- scopus:0042697754
- ISSN
- 1099-131X
- DOI
- 10.1002/for.867
- language
- English
- LU publication?
- yes
- id
- 33a6f474-b1b0-426e-8286-9c24b550559d (old id 900075)
- date added to LUP
- 2016-04-01 11:48:48
- date last changed
- 2022-04-13 01:40:56
@article{33a6f474-b1b0-426e-8286-9c24b550559d,
abstract = {{The Black-Scholes formula is a well-known model for pricing and hedging derivative securities. It relies, however, on several highly questionable assumptions. This paper examines whether a neural network (MLP) can be used to find a call option pricing formula better corresponding to market prices and the properties of the underlying asset than the Black-Scholes formula' The neural network method is applied to the out-of-sample pricing and delta-hedging of daily Swedish stock index call options from 1997 to 1999. The relevance of a hedge-analysis is stressed further in this paper. As benchmarks, the Black-Scholes model with historical and implied volatility estimates are used. Comparisons reveal that the neural network models outperform the benchmarks both in pricing and hedging performances. A moving block bootstrap is used to test the statistical significance of the results. Although the neural networks are superior, the results are sometimes insignificant at the 5% level. Copyright (C) 2003 John Wiley Sons, Ltd.}},
author = {{Amilon, Henrik}},
issn = {{1099-131X}},
keywords = {{neural networks; option pricing; hedging; bootstrap; inference; statistical}},
language = {{eng}},
number = {{4}},
pages = {{317--335}},
publisher = {{John Wiley & Sons Inc.}},
series = {{Journal of Forecasting}},
title = {{A neural network versus Black-Scholes: A comparison of pricing and hedging performances}},
url = {{http://dx.doi.org/10.1002/for.867}},
doi = {{10.1002/for.867}},
volume = {{22}},
year = {{2003}},
}