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Wavelet-based option pricing: An empirical study

Liu, Xiaoquan and Cao, Yi and Ma, Chenghu and Shen, Liya (2018) 'Wavelet-based option pricing: An empirical study.' European Journal of Operational Research. ISSN 0377-2217

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Abstract

In this paper, we scrutinize the empirical performance of a wavelet-based option pricing model which leverages the powerful computational capability of wavelets in approximating risk-neutral moment-generating functions. We focus on the forecasting and hedging performance of the model in comparison with that of popular alternative models, including the stochastic volatility model with jumps, the practitioner Black-Scholes model and the neural network based model. Using daily index options written on the German DAX 30 index from January 2009 to December 2012, our results suggest that the wavelet-based model compares favorably with all other models except the neural network based one, especially for long term options. Hence our novel wavelet-based option pricing model provides an excellent nonparametric alternative for valuing option prices.

Item Type: Article
Uncontrolled Keywords: Pricing; Option Valuation; Arti cial Neural Networks; Stochastic Volatility; Jump Risk
Subjects: H Social Sciences > HG Finance
Q Science > QA Mathematics > QA75 Electronic computers. Computer science
Divisions: Faculty of Social Sciences > Essex Business School
Faculty of Social Sciences > Essex Business School > Essex Finance Centre
Depositing User: Elements
Date Deposited: 17 Jul 2018 14:20
Last Modified: 30 Jul 2018 10:15
URI: http://repository.essex.ac.uk/id/eprint/22664

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