Thesis (PhD)--Macquarie University, Division of Economic and Financial Studies, Dept. of Statistics, 2008. / Bibliography: p. 73-77. / Introduction -- Lévy processes used in option pricing -- Option pricing for Lévy processes -- Option pricing based on empirical characteristic functions -- Performance of the five models on historical data -- Conclusions -- References -- Appendix A. Proofs -- Appendix B. Supplements -- Appendix C. Matlab programs. / Pricing problems of financial derivatives are among the most important ones in Quantitative Finance. Since 1973 when a Nobel prize winning model was introduced by Black, Merton and Scholes the Brownian Motion (BM) process gained huge attention of professionals professionals. It is now known, however, that stock market log-returns do not follow the very popular BM process. Derivative pricing models which are based on more general Lévy processes tend to perform better. --Carr & Madan (1999) and Lewis (2001) (CML) developed a method for vanilla options valuation based on a characteristic function of asset log-returns assuming that they follow a Lévy process. Assuming that at least part of the problem is in adequate modeling of the distribution of log-returns of the underlying price process, we use instead a nonparametric approach in the CML formula and replaced the unknown characteristic function with its empirical version, the Empirical Characteristic Functions (ECF). We consider four modifications of this model based on the ECF. The first modification requires only historical log-returns of the underlying price process. The other three modifications of the model need, in addition, a calibration based on historical option prices. We compare their performance based on the historical data of the DAX index and on ODAX options written on the index between the 1st of June 2006 and the 17th of May 2007. The resulting pricing errors show that one of our models performs, at least in the cases considered in the project, better than the Carr & Madan (1999) model based on calibration of a parametric Lévy model, called a VG model. --Our study seems to confirm a necessity of using implied parameters, apart from an adequate modeling of the probability distribution of the asset log-returns. It indicates that to precisely reproduce behaviour of the real option prices yet other factors like stochastic volatility need to be included in the option pricing model. Fortunately the discrepancies between our model and real option prices are reduced by introducing the implied parameters which seem to be easily modeled and forecasted using a mixture of regression and time series models. Such approach is computationaly less expensive than the explicit modeling of the stochastic volatility like in the Heston (1993) model and its modifications. / Mode of access: World Wide Web. / x, 111 p. ill., charts
| Identifer | oai:union.ndltd.org:ADTP/285205 |
| Date | January 2008 |
| Creators | Binkowski, Karol Patryk |
| Publisher | Australia : Macquarie University |
| Source Sets | Australiasian Digital Theses Program |
| Language | English |
| Detected Language | English |
| Rights | Copyright disclaimer: http://www.copyright.mq.edu.au, Copyright Karol Patryk Binkowski 2008. |
Page generated in 0.0384 seconds