Models for option pricing based on empirical characteristic function of returns

Karol Binkowski, and Andrzej Kozek. "Models for option pricing based on empirical characteristic function of returns." Banach Center Publications 90.1 (2010): 13-26. <http://eudml.org/doc/282312>.

@article{KarolBinkowski2010,
abstract = {The standard Merton-Black-Scholes formula for European Option pricing serves only as approximation to real values of options. More advanced extensions include applications of Lévy processes and are based on characteristic functions, which are more convenient to use than the corresponding probability distributions. We found one of the Lewis (2001) general theoretical formulae for option pricing based on characteristic functions particularly suitable for a statistical approach to option pricing. By replacing the unknown theoretical characteristic function with the empirical one the obtained model can be considered as a consistent estimator of the original Lewis formula. We explore the behaviour of this model on empirical data and conclude that it is necessary to allow for two additional implied parameters to obtain option pricing superior to other models reported in the literature.},
author = {Karol Binkowski, Andrzej Kozek},
journal = {Banach Center Publications},
keywords = {option pricing; empirical characteristic function; implied parameters; Lévy processes},
language = {eng},
number = {1},
pages = {13-26},
title = {Models for option pricing based on empirical characteristic function of returns},
url = {http://eudml.org/doc/282312},
volume = {90},
year = {2010},
}

TY - JOUR
AU - Karol Binkowski
AU - Andrzej Kozek
TI - Models for option pricing based on empirical characteristic function of returns
JO - Banach Center Publications
PY - 2010
VL - 90
IS - 1
SP - 13
EP - 26
AB - The standard Merton-Black-Scholes formula for European Option pricing serves only as approximation to real values of options. More advanced extensions include applications of Lévy processes and are based on characteristic functions, which are more convenient to use than the corresponding probability distributions. We found one of the Lewis (2001) general theoretical formulae for option pricing based on characteristic functions particularly suitable for a statistical approach to option pricing. By replacing the unknown theoretical characteristic function with the empirical one the obtained model can be considered as a consistent estimator of the original Lewis formula. We explore the behaviour of this model on empirical data and conclude that it is necessary to allow for two additional implied parameters to obtain option pricing superior to other models reported in the literature.
LA - eng
KW - option pricing; empirical characteristic function; implied parameters; Lévy processes
UR - http://eudml.org/doc/282312
ER -