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Activity Number:
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407
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Type:
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Contributed
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Date/Time:
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Thursday, August 15, 2002 : 10:30 AM to 12:20 PM
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Sponsor:
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Business & Economics Statistics Section*
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| Abstract - #301473 |
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Title:
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Intraday Stock Return Distribution for Black-Scholes Option Pricing
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Author(s):
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Tak Cheung*+ and Daniel Tsang
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Affiliation(s):
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City University of New York-Queensborough Community College and City University of New York-Queensborough Community College
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Address:
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222-05 56th Avenue, Bayside, New York, 11364, USA
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Keywords:
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volatility estimation ; Levy-Gaussian convergence ; diffusive system ; bootstrap ; investment strategy
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Abstract:
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The availability of intraday stock/index return in the Web facilitates the improvement of return volatility estimation over the traditional method that is based on inter-day return data. Truncated Levy process distribution is used to extract the intraday return distribution parameters. The calibration to the volatility for Black-Scholes option pricing is studied using the data from Levy-Gaussian convergence in physical diffusive systems, as well as using the empirical implied volatility values. It appears that intraday return distribution parameters give short-term call option prices closer to the market values. Robustness is investigated using bootstrap data. The resulting volatility variability is studied in contrast to the observed intraday fluctuation of the implied volatility. Application to investment strategy is also discussed.
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