A Comparison between B-S Model and Stochastic Volatility Option Pricing Models: Empirical Evidence from TAIEX Options

• Main Authors: Jiun-Hung Chen, 陳浚泓
• Other Authors: Hsinan Hsu
• Format: Others
• Language: zh-TW
• Published: 2003
• Online Access: http://ndltd.ncl.edu.tw/handle/75058705066275066152

碩士 === 國立成功大學 === 企業管理學系碩博士班 === 91 === Since 1973 Black and Scholes published the famous option pricing model, option pricing theory has become an academic research focus. As a result of many unduly simplified assumptions of the B-S model, many scholars started to modify the B-S model, such as the “stochastic volatility option model”, “stochastic interest rate option model” and “stochastic volatility and poisson jump diffusion option model”. Many scholars devoted themselves to investigate the issue about whether the free-restricted models outperform the B-S model. Most empirical results indicated that the free-restricted models outperform the B-S model. Since the stock index option is a new financial derivatives in Taiwan, the pricing behavior of stock index options is concerned by investors as well as academic workers. However, up to date, the pricing behavior of index options has not been found in the literature. This study will bridge this gap. This study investigates the B-S, Hull & White (1987) and Heston (1993) models with historical and GJR GARCH volatilities on “the Taiwan Stock Exchange Capitalization Weighted Stock Index Options.” In particular, this study measures and compares the pricing biases between theoretical and market prices, and proceeds to analyze the cause to pricing biases. The empirical results indicate that: 1.For far month TAIEX Options, the smallest MAE and RMSE pricing errors take place on Heston (1993) model with historical volatility. 2.For near month TAIEX Options, all models with two kinds of volatility seem to overprice deep-in-the-money, in-the-money and at money options. However, all models with two kinds of volatilities seem to underprice out-of-the-money and deep-out-of-the-money options. 3.For near month TAIEX Options, the B-S model with historical volatility outperforms any other models; however, Heston (1993) model with GJR GARCH volatility seems to be the poorest model. 4.For far month TAIEX Options, the Heston (1993) model with historical volatility seems to be the best model; however, the Hull & White (1987) model with GJR GARCH volatility seems to be the poorest model. 5.GJR GARCH volatility does not seem to outperform historical volatility and stochastic volatility option pricing model does not seem to outperform the B-S model. 6.For all option pricing models, the pricing errors are systematically related to the extent to which the options are in-the-money, time to maturity, percentage change in stock index, and the volatility of the underlying assets.