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Activity Number:
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463
- SPEED: Methodological Advances in Time Series: BandE Speed Session, Part 1
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Type:
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Contributed
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Date/Time:
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Wednesday, July 31, 2019 : 8:30 AM to 10:20 AM
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Sponsor:
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Business and Economic Statistics Section
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Abstract #306653
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Title:
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Empirical Testing of an Option Pricing Model with Memory
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Author(s):
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Flavia Sancier-Barbosa* and Lochana Siriwardena
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Companies:
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Colorado College and University of Indianapolis
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Keywords:
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Option pricing;
empirical testing;
stock market data;
Black-Scholes;
stochastic models with memory;
time series forecasting
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Abstract:
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We discuss the preliminary testing of a continuous option pricing model with memory and intrinsic stochastic volatility. The stock dynamics follows a nonlinear stochastic functional differential equation with a closed-form solution and the option pricing formula is a conditional expectation that can be simulated via Monte Carlo methods. We tested the model for the S&P500 index during two time periods: during and after the 2008-2009 financial crisis. The model's performance was compared to the Black-Scholes model for different memory lengths, contract expiration times, and moneyness. We found that the option pricing model with memory was more accurate than Black-Scholes during the crisis, while the opposite was true in the post-crisis period.
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Authors who are presenting talks have a * after their name.
