A Model Selection Framework for Pricing Options

24 Pages Posted: 21 Jul 2016

See all articles by Berk Orbay

Berk Orbay

Bogazici University - Department of Industrial Engineering

Refik Güllü

Bogazici University - Department of Industrial Engineering

Wolfgang Hörmann

Bogazici University - Department of Industrial Engineering

Date Written: July 20, 2016

Abstract

Empirical studies show that even the best performing option pricing models cannot sustain their performance for all contracts. It can also be added that each model can give the best price estimate for at least a set of contracts. Our aim is to detect which model (and parametrization) is the best price estimate for each individual contract and delta hedging. A model selection framework is proposed to achieve this aim. Both model selection and individual models are benchmarked with different error metrics and underlying assets. Results indicate that model selection is a good and consistent way of pricing option contracts.

Keywords: Option Pricing, Quantitative Finance, Hyperheuristics, Market Efficiency

Suggested Citation

Orbay, Berk and Güllü, Refik and Hörmann, Wolfgang, A Model Selection Framework for Pricing Options (July 20, 2016). Available at SSRN: https://ssrn.com/abstract=2812392 or http://dx.doi.org/10.2139/ssrn.2812392

Berk Orbay (Contact Author)

Bogazici University - Department of Industrial Engineering ( email )

Endüstri Mühendisliği Bölümü, Boğaziçi Üniversites
Bebek
İstanbul, 34342
Turkey

HOME PAGE: http://www.boun.edu.tr

Refik Güllü

Bogazici University - Department of Industrial Engineering ( email )

Endüstri Mühendisliği Bölümü, Boğaziçi Üniversites
Bebek
İstanbul, 34342
Turkey

Wolfgang Hörmann

Bogazici University - Department of Industrial Engineering ( email )

Endüstri Mühendisliği Bölümü, Boğaziçi Üniversites
Bebek
İstanbul, 34342
Turkey

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