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A Comparison of Option Pricing Models:Evidence from European Call Options on Hong Kong Hang Seng Index

Zhao, Xiaoxu LU (2019) NEKN02 20191
Department of Economics
Abstract
Options play a significant role in the financial market. The pricing of the options is a prevailing topic in academia. The Black and Scholes (Black & Scholes, 1973) model, on the one hand, was applauded by its simplicity and ease of use, on the other hand, it was criticized by the practitioner and academics because of the over-idealized constant volatility and underlying distribution assumptions. There have been models derived afterwards to mitigate these problems. This thesis calibrates and examines three options pricing models: the Black and Scholes model (1973), Practitioner Black Scholes (Dumas et al., 1998) model and Heston (1993) model and their option pricing performance on the call options written on Hong Kong Hang Seng Index.
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Options play a significant role in the financial market. The pricing of the options is a prevailing topic in academia. The Black and Scholes (Black & Scholes, 1973) model, on the one hand, was applauded by its simplicity and ease of use, on the other hand, it was criticized by the practitioner and academics because of the over-idealized constant volatility and underlying distribution assumptions. There have been models derived afterwards to mitigate these problems. This thesis calibrates and examines three options pricing models: the Black and Scholes model (1973), Practitioner Black Scholes (Dumas et al., 1998) model and Heston (1993) model and their option pricing performance on the call options written on Hong Kong Hang Seng Index.
The calibration of the model is implemented by changing the parameters to minimize a certain loss function jointly determined by the model price and market price. The parameters estimate then are used in the test of the one day out of sample model performance. The results indicate that Black and Scholes model has the worst prediction performance and that the pricing accuracy of Practitioner Black Scholes model and Heston model are comparable in term of the options value pricing. Heston model produces a lower implied volatility error. (Less)
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author
Zhao, Xiaoxu LU
supervisor
organization
course
NEKN02 20191
year
type
H1 - Master's Degree (One Year)
subject
keywords
option pricing, Heston model, Hong Kong Hang Seng Index, model calibration
language
English
id
8984208
date added to LUP
2019-08-08 10:28:16
date last changed
2019-08-08 10:28:16
@misc{8984208,
  abstract     = {{Options play a significant role in the financial market. The pricing of the options is a prevailing topic in academia. The Black and Scholes (Black & Scholes, 1973) model, on the one hand, was applauded by its simplicity and ease of use, on the other hand, it was criticized by the practitioner and academics because of the over-idealized constant volatility and underlying distribution assumptions. There have been models derived afterwards to mitigate these problems. This thesis calibrates and examines three options pricing models: the Black and Scholes model (1973), Practitioner Black Scholes (Dumas et al., 1998) model and Heston (1993) model and their option pricing performance on the call options written on Hong Kong Hang Seng Index. 
The calibration of the model is implemented by changing the parameters to minimize a certain loss function jointly determined by the model price and market price. The parameters estimate then are used in the test of the one day out of sample model performance. The results indicate that Black and Scholes model has the worst prediction performance and that the pricing accuracy of Practitioner Black Scholes model and Heston model are comparable in term of the options value pricing. Heston model produces a lower implied volatility error.}},
  author       = {{Zhao, Xiaoxu}},
  language     = {{eng}},
  note         = {{Student Paper}},
  title        = {{A Comparison of Option Pricing Models:Evidence from European Call Options on Hong Kong Hang Seng Index}},
  year         = {{2019}},
}