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Wavelet-based option pricing: An empirical study

Liu, Xiaoquan, Cao, Yi, Ma, Chenghu and Shen, Liya (2019) Wavelet-based option pricing: An empirical study European Journal of Operational Research, 272 (3). pp. 1132-1142.

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Abstract

In this paper, we adopt a wavelet-based option pricing model and empirically compare its forecasting and hedging performance with that of other popular models, including the stochastic volatility model with jumps, the practitioner Black-Scholes model and the neural network based model. We use daily index options written on the German DAX 30 index from January 2009 to December 2012. Our results show that the wavelet-based model compares favorably with all other models except the neural network based one, especially for long-term options, and that it provides an excellent alternative for valuing option prices. Its strong performance comes from the powerful ability of the wavelet method in approximating the risk-neutral moment-generating functions.

Item Type: Article
Divisions : Faculty of Arts and Social Sciences > Surrey Business School
Authors :
NameEmailORCID
Liu, Xiaoquan
Cao, Yiyi.cao@surrey.ac.uk
Ma, Chenghu
Shen, Liya
Date : 1 February 2019
DOI : 10.1016/j.ejor.2018.07.025
Copyright Disclaimer : © 2018. This manuscript version is made available under the CC-BY-NC-ND 4.0 license http://creativecommons.org/licenses/by-nc-nd/4.0/
Uncontrolled Keywords : Pricing; Option Valuation; Artificial Neural Networks; Stochastic Volatility; Jump Risk
Depositing User : Clive Harris
Date Deposited : 23 Jul 2018 08:05
Last Modified : 26 Jul 2020 02:08
URI: http://epubs.surrey.ac.uk/id/eprint/848762

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