A Model Selection Framework for Pricing Options
24 Pages Posted: 21 Jul 2016
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
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