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Wavelet-based option pricing: An empirical study

Liu, Xiaoquan and Shen, Liya (2017) Wavelet-based option pricing: An empirical study. Working Paper. Essex Finance Centre Working Papers. (Unpublished)

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Abstract

In this paper, we adopt a wavelet-based option valuation model and empirically compare the pricing and forecasting performance of this model with that of the stochastic volatility model with jumps and the spline method. Both the in-sample valuation and out-of-sample forecasting accuracy are examined using daily index options in the UK, Germany, and Hong Kong from January 2009 to December 2012. Our results show that the wavelet-based model compares favorably with the other two models and that it provides an excellent alternative for valuing option prices. Its superior performance comes from the powerful ability of the wavelet method in approximating the risk-neutral moment-generating functions.

Item Type: Monograph (Working Paper)
Uncontrolled Keywords: Pricing; Option Pricing; Wavelet Method; Stochastic Volatility; Jump Risk
Subjects: H Social Sciences > HG Finance
Divisions: Faculty of Social Sciences > Essex Business School
Faculty of Social Sciences > Essex Business School > Essex Finance Centre
Depositing User: Jim Jamieson
Date Deposited: 09 Jan 2017 14:52
Last Modified: 23 Feb 2021 09:15
URI: http://repository.essex.ac.uk/id/eprint/18772

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